9911796707
TMI Blog2015 (4) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... . One of the issue that came up for consideration in the course of assessment proceedings u/s. 143(3) of the Act was as to, whether a sum of Rs. 14,27,65,043 which was debited to the P&L account under the head 'compensation in lieu of cancellation of contract' and claimed as deduction while computing income from business can be allowed or not? 5. The material facts with regard to the aforesaid claim made by the assessee are as follows. The assessee was in possession of around 100 acres of non-agricultural land situated in Whitefield area (hereinafter referred to as "Whitefield land"). On 17/5/96, it entered into a shareholder's agreement with M/s Unitech Ltd. ["Unitech"] to jointly develop the land under a project called 'Shantiniketan'. Under the terms of the agreement, Unitech was offered 50% shareholding of the company. The paid up share capital of the Assessee consisted of 20,000 equity shares of the face value of Rs. 1,000 for each share, i.e., total paid-up capital of the company was Rs. 2 crores. By virtue of the agreement, the paid up capital was increased to Rs. 10 crores. Unitech was to subscribe 25000 equity shares of the face value of Rs. 1000 each at a premium of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to develop a residential complex by the name 'Prestige Shantiniketan'. Consequent to the cancellation of the agreement, the assessee debited the difference between the payment made to Unitech Ltd. of Rs. 37.50 crores and payment received from them of Rs. 23.22 crores, being Rs. 4,27,65,043 to the P&L Account for the previous year relevant to AY 05-06 as compensation in lieu of cancellation of contract. The question before the AO was as to whether the said claim for deduction can be allowed revenue expenditure for the previous year 6. According to the AO, the effect of the cancellation agreement dt. 28/2/05 was to free the title of the land from the encumbrance created in favour of Unitech. Taking into consideration the substantial increase in the value of land in the intervening period between 1999 and 2005, a premium of Rs. 14.27 crores was paid to Unitech and the said payment was for the purpose of ensuring Assessee's clear title to the Whitefield land which was to be developed by PEPL and was directly attributed towards increase in the value of the land. The AO also noticed that the Whitefield land was held by the Assessee as investment was converted into stock-in-trade by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loss of Rs. 14.27 crores in terminating its agreement with Unitech. The point of dispute is whether the amount is allowable in the current year. The assessee has argued that the amount is revenue expenditure required to be al1owed u/s 37(1). The property was stock-in-trade of the company, and the loss was incurred in perfecting the title of the land. It is therefore admissible under S. 37(1). However the contention is the year in which the amount is to he a1lowed as revenue expenditure. The assessee has categorically stated that it is following project completion method for recognition of the profits from the joint venture development of the 'Shantiniketan' Project. The amount of Rs. 14.27 crores is direct expenditure incurred on the land. Therefore the expenditure is allowable only in the year in which income arises from the project. This is the fundamental principle of accounting under the project completion method. It may also be noted that during the year the assessee earned revenue from works contract. The true profits of the works contract will not be reflected if expenditure of another project from which no revenue is recognized, is charged off against the works contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed property and the person executing the agreement has been duly authorized to execute the agreement and all other consequential documents/deeds/including the power of attorney for transfer/surrender/relinquishment of right etc., vested in the stock. 6. From the Joint Development Agreement, clause (xviii) it is clear that the shareholders of the assessee company in their General Body Meeting held on 28-01-2005 had resolved and approved the joint development of the said property with M/s. PEPL and pursuant to which the Board of Directors have also resolved and approved the Joint Development of property with M/s. PEPL and to sign and execute all memorandum of understanding, development agreements, power of attorney, various other agreements and conveyances with and in favour of M/s. PEPL to successfully complete the development of the project. 7. As per the JDA at page 11, the assessee company has allowed M/s. PEPL for construction of various buildings as agreed upon. It was also agreed that the assessee company will not revoke the agreement given to M/s. PEPL till the completion of the entire project. Accordingly, the assessee company has handed over the possession of the stock to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.]" 11. The above provision very clearly indicates that on sale of stock or other wise transferred the income so earned is the income which is required to be charged to tax. In the instant case the assessee company has executed JDA and further executed a power of attorney on 05/02/2005 and 01/03/2005 in favour of M/s. PEPL for transfer of stock for development. By such act of transfer/relinquishment /sale of stock to the developer and receipt of consideration is nothing but transfer by otherwise. That is, such kind of otherwise transfer made for gain through which the right/benefit/vested in the property is given away, all such transactions falls with in the ambit of the chargeability to tax. Therefore from this act of the assessee company, it is clearly evident that the stock held by it has been transferred/relinquished/ sold to the developer for receipt of consideration in the form of kind. That is to say to get the consideration in the form of constructed area. Thus the consideration so r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non refundable deposit is nothing but the part of the sale consideration on transfer of stock. 15. It is also noted that the assessee company M/s. CPPL has received yearly amounts of consideration out of developed land and building sold through the agency of M/s. PEPL. The said amounts are reflected as amount received from M/s. PEPL as per the Balance sheet filed by assessee company. The same are reflected as below: Sl.No. Amount shown as received from M/s. PEPL are from Shanthi Niketan Project as per Balance sheet filed by the assessee company Surety deposit received Advance received for flats from Prestige Project As on 31.3.2005 43,00,02,271 NIL 1 As on 31.3.2006 74,00,12,271 11,59,29,429 2 As on 31.3.2007 65,00,12,271 58,02,85,167 3 As on 31.3.2008 138,00,12,271 90,67,85,167 4 As on 31.3.2009 138,00,12,271 90,67,85,167 16. The various High Courts have held that capital gains is liable o tax on account of Joint Development agreement entered by the land owner with the builder and on account of handing over of the possession of the property. In this case reference is made to the decision of Hon'ble Bombay Court in the case of M/s. Chat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons to believe that taxable income of the assessee has escaped to the extent of Rs. 91,85,16,477/-. 20. Issue notice u/s. 148 to initiate reassessment proceedings." 12. It could be seen from the facts narrated as above that the proceeding u/s. 147 of the Act were sought to be initiated after a period of four years from the end of the relevant assessment year. It is also clear from the facts narrated as above that in the case of assessee for the A.Y. 2005-06, an order of assessment u/s. 143(3) of the Act had already been made. Therefore, proviso to section 147 of the Act will apply. 13. It can also be seen from the reasons recorded by the AO for initiating proceedings u/s.147 of the Act, that the narration in para 1 to 9 of the reasons recorded are facts which were well within the knowledge of the AO while completing the original assessment proceedings u/s.143(3) of the Act. The joint development agreement between the Assessee and PEPL was taken note by the AO in the order passed u/s.143(3) of the Act. The narration in para-10 in the reasons recorded by the AO relate to application of the provisions of Sec.45(2) of the Act. As we have already seen the Assessee held the White ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o to section 147 of the Act, the ld. counsel for the assessee contended as follows:- a) Initiation of reassessment proceedings is bad in law because proviso to Sec.147 will apply in the present case and therefore the initiation of reassessment proceedings can be only if there was failure on the part of the assessee to fully and truly disclose material facts necessary for assessment of income for AY 05-06. b) Initiation of reassessment proceedings are merely on a change of opinion and therefore bad in law. 14.1 On point (a) as above, the learned counsel for the Assessee submitted that the fact that assessee owned 100.02 acres of land in Whitefield and the fact that the aforesaid property was treated as investment as on 31.3.2004 and shown as stock-in-trade as on 31.3.2005 are all facts within the knowledge of the AO, while completing the original assessment u/s. 143(3) of the Act. The fact that the property was subject matter of the joint development agreement ("JDA") between the assessee and PEPL under an agreement dated 5.2.2005 to develop the same as a residential complex by name 'Shantiniketan' is also within the knowledge of the AO. All the relevant books of account as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that in the reasons so recorded by the AO, there has been no allegation that there was escapement of income due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of income of the assessee for A.Y. 2002-03. 14.4 Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT and ACIT v. Hewelett Packard Digital Global Solutions Ltd., ITA No.406 of 2007, judgment dated 19.09.2011, wherein the Hon'ble Karnataka High Court after making a reference to the decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar (2004) 137 Taxmann 479 (Bom) observed as follows:- "7. It is observed in the said judgment that the reason recorded by the Assessing Officer no where state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is for the Assessing Officer to disclose and open his mind through reasons. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn to the decision of the Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd. Vs. DCIT, 360 ITR 527 (Guj) wherein the Hon'ble Gujarat High Court held: "It is required to be noted that in the present case notice u/s 148 of the Act had been issued on 27/4/2011 in relation to the Assessment Year 2005- 06. Hence, admittedly the same had been issued after expiry of a period of four years from the end of the relevant assessment year. Under the circumstances, in light of the proviso to section 147 of the Act, in case, where assessment has been framed under section 143(3) of the Act, no action can be taken under section 147, unless income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for the assessment year. There was not even a whisper to the effect that income has escaped assessment on account of any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. Even while considering the objections raised by the assessee and replying to the assessee, there was no such case pleaded on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the fact that the Assessee has not filed any information to the effect that there was incidence of capital gain u/s. 45(2) of the Act, as per the return of income. Further reference was also made to Expln.1 to Sec.147 of the Act which lays down that merely filing of documents before AO from which facts regarding escapement of income could be gathered, will not necessarily amount to disclosure of all facts by an Assessee. Further reference was made to the fact that while completing the original assessment u/s.143(3) of the Act there was no discussion regarding applicability of Sec.45(2) of the Act. Reliance was placed on page-10 and 11 of the CIT(A)'s order wherein the CIT(A) has upheld the action of the AO in initiating proceedings u/s.147 of the Act. 16. The ld. counsel for the assessee, in rejoinder, pointed out to Explanation 1 to section 147 of the Act, which reads as under:- "Explanation 1.- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso." 17. According to him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment agreement in respect of the property as resulting to a transfer giving raise to charge of capital gain u/s.45(2) of the Act. It was pointed out by him that in the reasons recorded the AO has not referred to any material which had come into his possession subsequent to the passing of the order u/s.143(3) of the Act based on which he entertained belief that Development Agreement resulted in a Transfer and thereby provisions of Sec.45(2) of the Act became applicable. There being no material which has come to the possession of the AO since the conclusion of the original assessment proceedings, it was not possible for the AO to change or form a different opinion on the same set of facts and resort to reopening of a completed assessment. According to him, doing so will result in the AO reviewing his own order which is not legally permissible. According to him even assuming that there was a failure on the part of the AO in this regard, the appropriate action can only be under section 263 of the Act. It was his submission that the law is well settled that to assume jurisdiction u/s. 147 of the Act, there should be reason to believe that income chargeable to tax has escaped assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief." He laid emphasis on the fact that there was absence of tangible material in possession of the AO to come to conclusion that there was escapement of income from assessment. According to him, the present action of the AO is clearly a case of resort to reassessment proceedings merely on change of opinion. 21. We have given a very careful consideration to the rival submissions. As we have already seen the Assessee held the Whitefield property as investment and converted the same as stock-in-trade of business during the previous year relevant to AY 05-06. This fact has also been recorded by the AO in the order of assessment passed u/s.143(3) of the Act. Sec.45(2) of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act on 31.12.2007. The other decision referred to by the AO in the reasons recorded is CIT v. T.K. Dayalu, 202 Taxman 531. This decision was rendered on 20.6.2011, after the conclusion of the original assessment proceedings. The decision rendered subsequent to the original assessment proceedings will not mean that assessee did not fully and truly disclose material facts. If reassessment proceedings are initiated on the basis of a subsequent judicial decision, then that would also be a case of change of opinion, as was held by the Hon'ble Bombay High Court in the case of Sesa Goa Ltd. v. JCIT, 294 ITR 101 (Bom) on which reliance was placed by ld. counsel for the assessee. 22. In the present case, the facts on record and reasons recorded clearly show that all facts were available before the AO when he completed the original assessment proceedings u/s. 143(3) of the Act. There is no tangible material which has come to the possession of the AO justifying initiation of reassessment proceedings. On the facts and circumstances of the present case, we are of the view that initiation of reassessment proceedings has been merely on the basis of change of opinion and in view of the law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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