TMI Blog2014 (12) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... in part performance of the agreement to sell the land was given possession and had also carried out the construction work for development of the housing project - Combined reading of Section 2(47)(v) and Section 53A of the Transfer of Property Act leads to conclusion even for limited purpose of Income tax that assessee had satisfied the condition of ownership also - assessees were entitled to the benefit u/s 80IB(10) even where the title of the lands had not passed on to the assessees and in some cases, the development permissions may also have been obtained in the name of the original land owners - the meaning assigned to the expression "works contract" in the cannot be imported while construing the meaning of the expression in the context of the provisions of the Income Tax Act – the order of the Tribunal is upheld – Decided against revenue. - TAX APPEAL NO.491 of 2014 With TAX APPEAL NO.492 of 2014 With TAX APPEAL NO.493 of 2014 - - - Dated:- 7-10-2014 - MS. HARSHA DEVANI AND MS. SONIA GOKANI, JJ. FOR THE APPELLANT : MR KM PARIKH, ADVOCATE FOR THE RESPONDENT : MR VIJAY S RANJAN, ADVOCATE JUDGEMENT Per: Harsha Devani: 1. The appellant - revenue in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rong if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immoveable property and levy of sales tax on the value of the material involved in the execution of the works contract. It was submitted that the said decision construes the expression works contract in general terms and not in terms of the relevant Sales Tax Act and as such, would apply to the facts of the present case. It was submitted that the facts of the present case are different from the facts in the case of Commissioner of Income-tax v. Radhe Developers, (2012) 341 ITR 483 (Guj.). It was contended that the above decision of this court was rendered in relation to cases prior to the insertion of the Explanation to section 80IB(10) of the Act and hence, the same would not be applicable to the fact of the present case. 2.1 It was further submitted that the Tribunal has failed to appreciate that land was allotted to the members and after allotment, the assessee firm entered into a contract for development, individually with each member, and that the assessee firm had executed a contract with each member for the plot allotted to them by the Society. It was argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Supreme Court in the case of Larsen and Toubro Limited (supra) has only confirmed what is held by it in its earlier decision in the case of Raheja Development Corporation (supra) and does not add anything to the issue of works contract. Therefore, reliance placed upon the decision of the Supreme Court in the case of Larsen and Toubro Limited (supra) to reopen a controversy which already stands concluded by this court by a series of decision is misconceived. 3.2 On the merits of the controversy, it was argued that the definition of works contract as defined under the relevant Sales Tax Act or Value Added Tax Act or under Article 366 (29-A)(b) of the Constitution cannot be imported in the Income Tax Act. Reference was made to the Statement of Objects and Reasons for amending Article 366 by including a definition of 'tax on the sale or purchase of goods' by inserting a new clause (29-A). It was pointed out that the amendment in the Constitution was brought about in view of the decision of the Supreme Court in Gannon Dunkerly case, AIR 1985 SC 560 and subsequent series of decisions of the Supreme Court based on that decision which held various transactions which re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings of fact recorded by the Commissioner (Appeals) and observed that as per the decision of this court in the case of M/s Radhe Developers (supra), the vital question which is to be seen is whether the assessee-developer is having dominant control over the land in question and whether the assessee-developer is bearing the entire risk and is entitled to the entire reward. In the light of the uncontroverted facts of the case as discussed in the impugned order, the Tribunal was of the opinion that all the pre-requirements for obtaining the benefit of section 80IB(10) of the Act are satisfied in the facts of the present case and therefore, in the light of the above decision of this High Court, the issue is covered in favour of the assessee. The Tribunal, accordingly, upheld the order passed by the Commissioner (Appeals) and dismissed the appeals. 7. Thus, the Tribunal upon appreciation of the evidence on record has found that the present case meets with the parameters laid down by this court in the case of Radhe Developers (supra). It is not the case of the appellant that the assessee does not fall within the ambit of the principles laid down by this court in that case. The conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the Tribunal, have failed to consider the above referred aspect. 8. Before adverting to the merits of the case, it may be germane to refer to the decisions on which reliance had been placed by the learned counsel for the respective parties. Since the Tribunal has upheld the order passed by the Commissioner (Appeals) on the basis of the decision of this court in the case of Commissioner of Income-tax v. Radhe Developers (supra), reference may be made to the findings recorded by the court in that decision, which are as follows:- 31. Neither the provisions of Section 80-IB nor any other provisions contained in other related statutes were brought to our notice to demonstrate that ownership of the land would be a condition precedent for developing the housing project. It was perhaps not even the case of the Revenue that under the other laws governing construction in urban and semi-urban areas, there was any such restriction. It is, however, the thrust of the argument of the Revenue that in order to receive benefit under Section 80- IB(10) of the Act, such requirement must be read into the statute. We cannot accept such a contention. Firstly, as already noted, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. The condition which is not made part of section 80-IB(10) of the Act, namely, that of owning the land, which the assessee develops, cannot be supplied by any purported legislative intent. 34. We have reproduced relevant terms of development agreements in both the sets of cases. It can be seen from the terms and conditions that the assessee had taken full responsibilities for execution of the development projects. Under the agreements, the assessee had full authority to develop the land as per his discretion. The assessee could engage professional help for designing and architectural work. The assessee would enroll members and collect charges. Profit or loss which may result from execution of the project belonged entirely to the assessee. It can thus be seen that the assessee had developed the housing project. The fact that the assessee may not have owned the land would be of no consequence. 35. With respect to the question whether the assessee had acquired the ownership of the land for the purposes of the Income-tax Act and, in particular, section 80-IB (10) of the Act and to examine the effect of the Explanation to section 80-IB(10) introduced with retrospectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he land price. Eventually after paying off the land owner and the erstwhile proposed purchasers, the surplus amount would remain with the assessee. Such terms and conditions under which the assessee undertook the development project and took over the possession of the land from the original owner, leaves little doubt in our mind that the assessee had total and complete control over the land in question. The assessee could put the land to use as agreed between the parties. The assessee had full authority and also responsibility to develop the housing project by not only putting up the construction but by carrying out various other activities including enrolling members, accepting members, carrying out modifications engaging professional agencies and so on. Most significantly, the risk element was entirely that of the assessee. The land owner agreed to accept only a fixed price for the land in question. The assessee agreed to pay off the land owner first before appropriating any part of the sale consideration of the housing units for his benefit. In short, the assessee took the full risk of executing the housing project and thereby making profit or loss as the case may be. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the materials. The Supreme Court noted that a contract for work in the execution of which goods are used may take one of three forms. Those three forms were elaborated as follows (page 1404 of AIR 1965 SC and page 255 of 16 STC): 'The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price: it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work: or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though the property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first: it is a composite contract for work and sale of goods: where it is of the second category, it is a contract for execution of work not involving sale of goods.' In a subsequent decision in the State of Punjab and Haryana v. Associated Hotels of India Ltd., AIR 1972 SC 1131; 29 STC 474, the Supreme Court held that a contract for sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a contract of sale , the main object is the transfer of property and delivery of possession of the property, whereas the main object in a contract for work is not the transfer of the property but it is one for work and labour. Another test often to be applied is: when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a sale ; if it is the latter, it is a works contract . Therefore, in judging whether the contract is for sale' or for work and labour , the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a sale or a works contract . Essentially, the question is of interpretation of the contract . It is settled law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entered into and the custom of the trade. The substance of the matter and not the form is what is of importance. If a contract involves the sale of movable property as movable property, it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour. One of the circumstances which is of relevance is whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price. If the article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery, that is important indicator to suggest that the contract is a contract for sale and not a contract for work. In India, the distinction between the two categories is elucidated by the Sale of Goods Act, 1930. Sub-section (1) of section 4 provides that a contract of the sale of goods is a contract, whereby a seller transfers or agrees to transfer the property in goods to the buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade provides a guide in deciding whether transaction is a 'sale' or a 'workscontract'. Essentially, the question is of interpretation of the 'contract'. It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contract. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a 'sale' or a 'works-contract'. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties. 39. In the present case, as already held the assessee had undertaken the development of a housing project at its own risk and cost. The land owner had accepted only the full price of the land and nothing further. The entire risk of investment and expenditure was that of the assessee. Resultantly, profit and loss also would accrue to the assessee alone. In that view of the matter, the addition of the Explanation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to sell the land in question, was given possession thereof and had also carried out the construction work for development of the housing project. Combined reading of Section 2(47)(v) and Section 53A of the Transfer of Property Act would lead to a situation where the land would be for the purpose of Income-tax Act deemed to have been transferred to the assessee. In that view of the matter, for the purpose of income derived from such property, the assessee would be the owner of the land for the purpose of the said Act. It is true that the title in the land had not yet passed on to the assessee. It is equally true that such title would pass only upon execution of a duly registered sale deed. However, we are, for the limited purpose of these proceedings, not concerned with the question of passing of the title of the property, but are only examining whether for the purpose of benefit under section 80-IB(10) of the Act, the assessee could be considered as the owner of the land in question. As held by the apex court in the case of Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC), and in the case of CIT v. Podar Cement Pvt. Ltd. [1997[ 226 ITR 625 (SC), the ownership has been under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deduction under section 80-IB(10) of the Act. 9. In K. Raheja Development Corporation v. State of Karnataka, (2005) 141 STC 298, the Supreme Court was dealing with a case under the Karnataka Sales Tax Act, 1957. The court taking into consideration the definition of works contract as defined under section 2(1)(v-i) of the said Act, observed that the definition of the words works contract is very wide and it is not restricted to a works contract as commonly understood i.e. a contract to do some work on behalf of somebody else. The court held that the definition of works contract was a wide one which includes any agreement for carrying out building or construction activity for cash, deferred payment or other valuable consideration. The definition does not make a distinction based on who carries on the construction activity. Thus, even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. The court, accordingly, did not find the need to go into the question whether the appellants therein were owners as even if the appellants were owners, to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and many varieties of contract. Parliament had such wide meaning of works contract in its view at the time of the Forty-sixth Amendment. The object of insertion of clause (29-A) in Article 366 was to enlarge the scope of the expression tax on sale or purchase of goods and overcome Gannon Dunkerley [AIR 1958 SC 560]. The court further held thus: 72. Seen thus, even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. Once the characteristics or elements of works contract are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term works contract . Nothing in Article 366(29-A)(b) limits the term works contract to contract for labour and service only. The learned Advocate General for Maharashtra was right in his submission that the term works contract ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of the Forty-sixth Amendment which was more than appropriate to Article 366(29-A)(b) and which was not restricted to works contract as commonly understood i.e. a contract to do some work on behalf of somebody else. The ordinary meaning of the term works contract means a contract to do some work on behalf of somebody else whereas in the above decisions, the Supreme Court having regard to the provisions of Article 366(29-A)(b) has adopted a wider meaning of the expression works contract . 12. Prior to the Forty-sixth Amendment in the Constitution, levy of sales tax on the sale of goods involved in the execution of the works contract was held to be unconstitutional in Gannon Dunkerley (supra). The problems connected with powers of the States to levy tax, inter alia, on goods involved in execution of works contract following Gannon Dunkerley (supra) were elaborately examined by the Law Commission of India. In its 61st Report the Law Commission specifically examined the taxability of works contract. The Law Commission noted the essential nature and features of the building contracts and the difference between contract of works and contract for sale. It examined the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n works contract was rendered in the background of the term works contract defined in Section 2(1)(v-i) of the Karnataka Sales Tax Act and it was in that backdrop that the Supreme Court concluded that the agreement was one of works contract. The court was of the view that the interpretation rendered by the apex court in the said decision was based not on the normal meaning of the term works contract but on the special meaning assigned to it under the Act itself, which provided for a definition of inclusive nature. The court was, accordingly, of the view that the Tribunal did not commit any error in holding that the assessees were entitled to the benefit under section 80IB of the Act even where the title of the lands had not passed on the assessees and under some cases the development permissions also have been obtained in the name of the original owners. 15. In Commissioner of Income Tax-I v. Archan Enterprises rendered on 18th March, 2014 in Tax Appeal No.171/2014, a Division Bench of this court had the occasion to consider the decision of the Supreme Court in the case of Larsen and Toubro Ltd. v. State of Karnataka (supra) and Raheja Development Corporation (supra) in th ..... 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