TMI Blog2014 (12) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by way of consortium agreement passed on the bundle of rights to the consortium - assessee has permitted mortgage of the said property by way of equitable mortgage in favour of ING Vysya Bank Ltd., to an extent of ₹ 36 crores for advance made to Dynasty Developers P. Ltd. - it cannot be stated that assessee has no right on the property when it admits and enters into agreement and even permits the Bank for an equitable mortgage of the property - all the contentions raised by assessee that it does not hold any capital asset, there are no transferable rights under the Transfer of Property Act and not transferred without registered document cannot be accepted. The extended definition as contained in section 2(47) even when a sale exchange or relinquishment or extinguishment of any right under a transaction, assessee is to be in possession of any immovable property or retained the same in part, performance of contract under section 53A of the Transfer of Property Act, it amounts to transfer - since assessee has given all rights in immovable property of which, consortium has taken approvals and constructed buildings, the contention that there is no capital asset no trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement which do not determine the transfer. 4. The learned Commissioner (Appeals) failed to appreciate the fact that the books of accounts and the Balance Sheet relied on by him are not the approved books of accounts of M/s. Embassy-ANL Consortium. 4.1. The learned Commissioner (Appeals) failed to appreciate the fact that the balance sheet relied on by the learned assessing officer was. only a provisional balance sheet and not an audited balance sheet. 4.2. The learned Commissioner (Appeals) failed .to appreciate the fact that there was no credit in the capital account of the assessee. 4.3. Without prejudice to the above the learned assessing officer failed in relying on the accounts and Balance Sheet pertaining to the financial year 2005-06 for completing the assessment for the financial year 2004-05 and as such no capital gains can be taxed for the A Y 2005-06. 5. The learned Commissioner (Appeals) failed to appreciate the fact that the learned assessing officer violated the principle of natural justice in as much as not giving the copies of the balance sheet relied on by him to the assessee and not providing an opportunity of cross examining the persons on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains as there was no capital asset and also the fact that there is no transfer as contemplated under section 2(47) of the I.T. Act. Assessing Officer, however, relying on the terms of consortium agreement, set aside the objections of assessee to hold that the transaction entered into by assessee comes within the purview of section 2(47) and in support discussed at length the definition of capital asset, property, lease rights, transfer of property etc., Assessing Officer also specifically discussed the provisions of section 2(47) (vi) inserted by Finance Act, 1987 with effect from 01.04.1988 as per which transfer in relation to a capital asset includes a transaction which has the effect of transferring or enabling the enjoyment of any immovable property . Assessing Officer also brought out the intention of bringing out this particular clause (vi) to section 2(47) to hold that in the instant case assessee by entering into Consortium Agreement has transferred its rights over the land to M/s. DDPL and accordingly, there is transfer of capital asset within the meaning of section 45(3) of the I.T. Act. Holding so, he brought the value of consideration recorded in the books of cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to them by KIADB and therefore the land in question is not a capital asset and consequently there is no capital gain. This submission of the assessee is contrary to what it has disclosed on its own in the para Q of notes to account in Annual Report for Financial Year 2005-06. The assessee discloses that it had entered into a consortium agreement and that it had contributed all its rights in the property (acquired through lease-cum-sale agreement) to the Consortium as its contribution towards capital. Relevant portion of the Annual Report is as follows: Q : The company has entered into a consortium agreement dated 10th Dec 2004 with M/s. Dynasty Developers P Ltd to promote and development of Land appearing in the books of account at ₹ 2,77,91,299/- at No.5 EPIP Area, Phase-I, White Field, Bangalore. As per the terms of the agreement the company is fifty percent associate / members of consortium created thereby and has contributed all its rights with regards to scheduled property as its contribution towards the capital of the consortium, Further a charge has been created on the landed property by way of equitable mortgage in favour of' ING-Vsya Bank Ltd to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment subject to conformity to KIADB rules and Regulations. 8.1.3 ANL assures and confirms that the title of the scheduled property is good, marketable and subsisting and not subject to any encumbrances, attachments, Court Orders, minor claims or any requisition or: acquisition proceedings or mortgage, charges, lien of any kind and that the same will be kept leaseable and marketable save and except the borrowing taken by the project based on the terms herein subject to KIADB NOC 8.1.4 ANL assures and confirms that they shall secure the sale deed from KIADB as per the prevailing norms within 180 days of execution of this agreement and obtain permission for development of the property based on- minimum FAR of 1.75 within 30 days of execution of this agreement. 7.3 In para 8.1.1 above, the assessee states that the property has been allotted to ANL, possession has been given to ANL and they are entitled to develop the schedule property as an infrastructure / commercial development within the existing rules of KIADB. Adding strength to this claim, the assessee further assures that there would be no impediment under any law, order, decree or contract for the development o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as its share to the Consortium, all its rights with regard to the scheduled property to the projects. 9.2) DYNASTY as its capital will in the first instance pay towards the cost of construction on the scheduled property to the extent of ₹ 10,76,61,044/-. 7.5 . Going by the entries in the books of JV, it can be seen that the account of assessee was credited with the value of land it contributed towards capital. Though during the course of assessment proceedings. the assessee contended that the books of JV are not under its control and M/s. DDPL had unilaterally passed entries in the books of JV, it is pertinent to note that while entering into Consortium agreement, the assessee on its own contributed the value of the land as its capital to JV. For this act of contribution, the assessee cannot throw the burden on anybody else and this clearly proves the assessee had a right over the land to develop the property unless it is contrary to the terms and conditions set forth by KIADB. Since this JV is not contrary to its terms, the KIADB had accordingly registered the land in the name of the assessee in the year 2007. Therefore. going by the above factual matrix. the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation - For the purposes of sub-clauses (v) and (vi), immovable property shall have the same meaning as in clause (d) of section 269UA. The above sub clause covers any transaction which has the effect of transferring or enabling the enjoyment of any immovable property. Therefore, the pre-requisite is that the asset transferred should be an immovable property. If the asset transferred is not an immovable property, then the transaction does not fall within the sub clause. 4.1.1. The explanation to the above sub clause states that the term immovable property shall have the meaning as in clause (d) of section 269UA, the same reads as follows : immovable property means (i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furnit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land is, or confers, an interest or a right in property. The fact that the right is created not by contract but by a statute cannot make a difference in the content or the incidents of the right: that depends upon the nature and the scope of the right conferred. The right conferred is a right to purchase land. If such a right conferred under a contract is not a right of property *, the fact that such a right stems from a statute cannot obviously expand its content or make it any the less a non-proprietary right. In our view, a statutory right to apply for the purchase of land is not a right of property. It is settled law that a contract to purchase a property does not create an interest in immovable property .... (p. 874) (* emphasis supplied) Based on the above decision of Hon'ble Supreme Court it can be said that the right acquired by assessee in this case was only a restrictive non transferable right to purchase the property and is not a right in the property. Therefore, this is not covered by the definition u/s. 269UA of IT Act. 4.1.4. It is submitted that there was no immovable property held by assessee and as such, the transaction is not covered by section 2(47)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferable leasehold rights. In this case, there was no transferable leasehold rights available to assessee. Therefore, those decisions cannot be relied on. Further, in those decisions, the leasehold rights were relating to mines which were business assets of the assessee. In this case, it is only a right to buy the land and as such, the facts of this case is different from the cases relating to lease rights 4.3. It was submitted that it is not a Transferable right under Transfer of Property Act. 1882 (T.P. Act). It was submitted that the covenants of the lease deed and the terms and conditions of the letter of allotment, clearly demonstrate that the property has to be enjoyed by the allottees. Even assuming but not admitting that the lease deed has created an interest in the property in favour of assessee, this is restricted in enjoyment to assessee. Therefore, this cannot be transferred as per section 6(d) of the TP Act. Though for the purpose of transfer a registered deed is not required under the deeming provisions of the IT Act, still a transfer which is not legally permitted cannot be a valid transfer. Since the TP Act specifically prohibits this kind of right from being tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it was only an agreement to transfer the rights, there was no actual transfer of rights. Further, as per clause 16(d) of the consortium agreement, assessee should within 60 days of the agreement secure permission from KIADB to effect lease/sub-lease of the property. This itself would indicate that till the permission is granted, there was no transfer. As per clause 20.6 of the agreement (refer page 43 of the paper book), if any term, condition or provision of the agreement is held to be a violation of any applicable Law, Statute or Regulation, the same shall be deemed to be deleted from the agreement and shall be of no force and effect . 4.5.2. It was submitted that the leasehold rights obtained by assessee are not transferable without the approval of the lessor. Further, they are also not transferable as per section 6(d) of the TP Act. Therefore, if clause 9 of the Consortium Agreement is read in such a manner that there is a transfer on entering into an agreement, then, the same is violating the provisions of the TP Act and also the terms and conditions of the Lease cum Sale Agreement. In view of the same, clause 9 of the Consortium Agreement has to be treated as non-exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee invoking the provisions of section 45(3) of the Income Tax Act, 1961. 4.9. It was further contended that the assessment is for the assessment year 2005-06. The assessment has been made based on the entries in the books and the alleged Balance Sheet of the consortium. All the documents are annexed to the assessment order. From the copy of the Day book of the consortium attached to the assessment order, it can be seen that the entry relating to the land was passed on 31-03-2006. Further, assessee has been shown as a sundry creditor as on 31-03-2006. This would indicate the fact that even if there was a transfer, it took place only during the financial year 2005-06 relevant to the assessment year 2006- 07 and as such, no capital gains can be taxed for the assessment year 2005-06. 5. In reply, learned D.R. also made elaborate arguments and refuted the objections of assessee by stating as under : 5.1. It was submitted that at clause VI at page 2 of the consortium agreement, it is clearly mentioned that ANL has represented that the schedule property has good clear and marketable title free from all encumbrances, attachments, liens, lis pendens, charges, mortgages, lien or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard-8(1) on the Embassy-ANL consortium. Inspection during the survey proceedings revealed that the project on the land consisted of two multistoried towers and one of the towers was 95% complete and the bare shell was complete on the other. The total carpet area of the project was about 3.5 lakh sft. The transaction was brought to tax only after initiation of reopening of the assessment proceedings. 5.6. It was submitted even if the arguments of the assessee that the project was under dispute were to be accepted for a moment as true, such a dispute would not in any way affect the fact that the land was already transferred by the assessee to the consortium. Any subsequent relinquishment of rights by one member of the consortium in favour of the other member would not affect the transfer of land from the assessee to the consortium. 5.7. In light of the above facts, it was submitted that the present case is a clear case of transfer of land from one of the members to the AOP on 10-12- 04. The consortium-AOP obtained necessary approvals and constructed the software park also immediately thereafter. Therefore, capital gains on transfer of the land arose (on the value of considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of short term capital gains. 5.11. It was also submitted that reliance of the assessee on the decision of Hon'ble Supreme Court in the case of Suraj Lamp Industries Pvt. Ltd is misplaced because the said decision is delivered in a different context of sale through GPAs/Sale Agreements under section 54 of the Transfer of Property Act with reference to conveyance of title. It may be submitted that in the said judgment itself, the Hon'ble Court observed that rights granted under section 53A of Transfer of Property Act are excluded. It is settled law that transfer under the Income Tax Act operates on the principle of beneficial ownership and not on legal ownership . Similarly, reliance on the decision of Delhi High Court in the case of J. Dalmia is not correct because the facts are different and the issue was related to assessability of damages received in a suit for specific performance. Reliance on the decision of Uttarakhand High Court in the case of Rajesh Kumar Agarwal is also incorrect because in the said case, there was no evidence of transfer to AOP nor there was an agreement with the AOP. In the present case, there is a consortium agreement for constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed by KIDAB and arrived at short term capital gains stating that the holding period is less than 3 years. 6.2. It was assessee s contention that first of all, there is no capital asset, there is no transfer, there is no capital gains to be taxed under section 45(3). In the alternate, assessee submits that even if capital gain is to be taxed, it will not be long term capital gains and not short term capital gains. 6.3. After considering the issue, we are of the opinion that the orders of Ld. CIT(A) on the issue of taxing capital gains are to be upheld. As rightly pointed out by the Ld. CIT(A), the property under consideration need not be immovable property. Assessee is having certain rights and the bundle of rights are transferred. Even though assessee relied on provisions of section 2(47)(vi) of the I.T. Act, the provision is very clear that any transaction which has the effect of transferring or enabling the enjoyment of any immovable property is covered by the definition of transfer even though assessee has argued that there is no immovable property, what the provision entitles is that of a transaction which has the effect of transferring or enabling the enjoyment of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he light of the expanded definition as contained in Section 2(47), even when a sale, exchange, or relinquishment or extinguishment of any right, under a transaction the assessee is put in possession of an immovable property or he retained the same in part performance of the contract under Section 53-A of the Transfer of Property Act, it amounts to transfer. No registered deed of sale is required to constitute a transfer. Similarly, any transaction whether by way of becoming a member of or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of any immovable property, also constitutes transfer and the assessee is said to hold the said property for the purpose of the definition of shortterm capital gain. In fact, the Circular No.495 makes it clear that transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are common mode of acquiring flats particularly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be viewed in the social milieu of a country. Therefore, keeping the aforesaid principles in mind, when we look at Section 48, the language employed is unambiguous. The intention is very clear. When a capital asset is transferred, in order to determine the capital gain from such transfer, what is to be seen is, out of full value of the consideration received or accruing, the cost of acquisition of the asset, the cost of improvement and any expenditure wholly or exclusively incurred in connection with such transfer is to be deducted. What remains thereafter is the capital gain. It is not necessary that after payment of cost of acquisition, a title deed is to be executed in favour of the assessee. Even in the absence of a title deed, the assessee holds that property and therefore, it is the point of time at which he holds the property, which is to be taken into consideration in determining the period between the date of acquisition and date of transfer of such capital gain in order to decide whether it is a short-term capital gain or a longterm capital gain. 6.4. In the light of the above, the extended definition as contained in section 2(47) even when a sale exchange or rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing given capital gains was rightly taxed in the impugned assessment year correctly. Therefore, the arguments of assessee on this are rejected. 9. Coming to the issue whether the capital gains arising in the transaction is that of short capital gain or long term capital gain, we are of the opinion that the gain has to be considered as long term capital gain. There is no dispute with reference to the fact that assessee was allotted the property on 10.01.2001. Even though the lease deed was registered on 02.09.2003, assessee has held it for more than three years by the time he has entered into an agreement on 10.12.2004. The Hon ble Karnataka High Court in the case of CIT vs. A. Suresh Rao (supra) has considered the issue and held as follows : 15. All the aforesaid judgments relied on by the Revenue are cases arising prior to the amendment to Section 2(47) of the Act. The very same judgments show, in particular the judgment of the Full Bench of the Gujarat High Court, the reasons for amendment i.e., even in the absence of a registered deed of transfer, if the transaction in question demonstrates the intention of the parties and after paying the entire consideration agreed upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a consideration for the same on 27.2.2008. It is thereafter the assessee transferr ed the site by way of a registered sale deed in favour of a purchaser on 29.5.2008 and received a consideration of ₹ 1 crore 13 lakhs. This site, which was transferred, he was holding it from 21.9.1988, when he paid the consideration on intimation of allotment. Merely because the original site which was allotted was cancelled, yet another site was allotted and the said site was also cancelled and thereafter the present site was allotted, in law would make no difference. Admittedly, the consideration paid on 21.9.1988 is treated as the consideration for the sale dated 27.2.2008. In other words, the cost of acquisition of the asset was paid on 21.9.1988 and no cost was paid either on the date of allotment i.e., on 15.2.2008 or on the date of registered sale deed on 27.2.2008. For the purpose of computing the capital gains under Section 48 of the Act, it is the date of acquisition of the asset, which is to be taken into consideration and the said cost of acquisition is to be converted as the indexed cost of acquisition as defined in the Explanation to Section 48 of the Act and, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to modify the computation accordingly. Ground Nos. 3 to 9 on the issue of taxability of capital gains are rejected and Ground No.10 pertaining to taxability as long term capital gain is allowed. 11. Ground No.11 pertains to issue in which assessee is contesting that the assessment year in the order and demand notice are wrongly mentioned. On the first page of the order indicate that assessment was made for A.Y. 2007-08 whereas the demand was raised for A.Y. 2005-06. Even though there was an error on the body of the order mentioning A.Y. as 2007-08, the proceedings under section 148 are incidentally initiated for A.Y. 2005-06 only and the every page of order (on the top of it), the A.Y. is mentioned as 2005-06. In fact, assessee preferred appeal before the Ld. CIT(A) for A.Y. 2005- 06 only and the demand notice was also issued for A.Y. 2005- 06. If the error in first page of the assessment order is not corrected by A.O. by this time, since, it is a curable defect, the A.O. is directed to modify the A.Y. from 2007-08 to A.Y. 2005- 06. However, there is no need to consider assessee s objections on this as the assessment order was passed for A.Y. 2005-06 and demand notice was al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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