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2016 (5) TMI 473

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..... is not transfer of assets. The assessment at ₹ 14 Crore is on the basis of 20% share of the profit which the assessee would have earned in future. The Tribunal has taken note of the fact that the share of the income is not taxable in the hands of the members. Ultimately, the Tribunal found that the addition of ₹ 14 Crore made under the head of capital gain was incorrect and the said addition is ordered to be deleted. - Decided against revenue - ITA NO.541/2015 - - - Dated:- 2-3-2016 - MR. JAYANT PATEL AND MRS. B.V.NAGARATHNA, JJ. FOR THE APPELLANT : SRI. JEEVAN J. NEERALGI FOR SRI. E. I. SANMATHI, ADV. JUDGMENT The appellants-Revenue has preferred the present appeal by raising the following question of law: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of ₹ 14 Crores made under the head capital gains when the settlement agreement reveals there was an agreement for outright transfer of land together with all the rights and as per Sec.2(47) the word transfer includes relinquishment of rights? 2. We have heard Mr. Jeevan J. Neeralgi appearing on behalf of Mr. E.I. San .....

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..... ever the CBDT Circular explaining the above insertion states that such insertion was only to take care of the claim of certain bodies that they did not fall within the definition of a 'person' for the sole reason, that they were not supposed to have any income or profits. Section 3 of 1922 Act though it provided an option to the assessing officer either to assess an AOP or its member, whichever was beneficial to the revenue, this option is no more there under the corresponding charging section 4 of the present Act. This has been clearly brought out by Hon. Apex Court in the case of Ch Atchaiah's case (supra). The scheme of taxation of AOP under different circumstances has been laid out in Section 167B of the Act. The taxation of the members of the AOP is dealt with under Section 67A of the Act. If the income of the members exceed the maximum amount which is not chargeable to tax then the total income of AOP is to be taxed at maximum marginal rate. By virtue of Section 86 read with Section 110 of the Act, if an AOP is chargeable to tax at maximum marginal rate then the share of profits in the hands of the members is not chargeable to tax at all. 19. Now against the .....

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..... ing Partridge and otherwise establish the title to Survey No.19 and 20. 2. Increase the subscribed and paid up equity share capital of the second member of the First Party from the present ₹ 5 lakhs to ₹ 50 lakhs. There shall be no change in the constitution of the Board of Directors of Ind-Sing Developers Pvt. Ltd. without the written consent of the Second Party. Disputes, if any, regarding the amount of stamp duty and registration charges (undervaluation) paid on the sale deeds shall be resolved and the original sale deeds furnished to King Partridge for their scrutiny. All title deeds to be delivered to the Second Party for custody. 3. After approval of the plans by the Bangalore Development Authority comply with the galore Development Authority's letter No.BDA/IPM/DD(E)/1287/92-93 dated 12th November 1992 and furnish to King Partridge in original no objection letters from K.E.B., B.W.S.S.B., receipted challans for having paid the statutory charges/levies as also the work order. The period of sixty days will not apply to this part of the condition and the Second Party will not make this a condition precedent for signing the formal agreement. The r .....

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..... U, the said sum of ₹ 5,00,000/- (Rupees Five Lakhs only) shall be refunded to the Second Party forthwith. VI. Board of Directors for First Party have passed resolution authorizing Mr. Eswar Prasad, a Director to sign this MOU. VII. parties shall, after the First Party complies with their obligations, sign a formal agreement and submit for the approval of Income Tax Authorities. 20. What strikes us from the above MOU is that assessee was not at all the owner of the property on the said date. Shri Gopalakrishna Gowda had agreed to purchase the subject property through two agreements from its owners and these agreements between Shri Gopalakrishna Gowda had nominated assessee in his place for acquiring the land. Assessee was to produce the documents of title and deposit such title deeds with M/s. King and Partridge. Assessee was to bring the property into a stage fit for development. Shri Pradeep Kumar Sharma was to prepare the project plan, building plan, and execute the project. However marketing and management of the project was to be done by Shri Pradeep Kumar Sharma in consultation with the assessee. 21. Now we will have a look at the principal agreement .....

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..... ltation with the First Party. 3.3 The Second Party shall not be deemed to be in default if the performance of his obligations herein is delayed or prevented by conditions constituting 'force majoure' which shall include but not limited to any laws, orders, bye-laws, rule or direction of any Governmental authority or Municipal or statutory agency, restraints, injunctions, withdrawal of permissions, non-availability of construction materials, strikes, or any concerted action of workmen delaying or interrupting the work, fire or any act of God or any other reason or cause whatsoever beyond the Control of the Second Party. ARTICLE 4 4.1. The Second Party shall develop the contract property on sound financial lines. 4.2. In the event that it is necessary for the second Party to procure loans sufficient to meet financial requirements for the development and tenders require financial assurance or the security Contract Property, the contract property shall be so mortgaged by the first Party and if any other personal guarantee is given by the parties, their liability in such guarantee shall be 40% and 60% respectively. Provided that the Second Party shall be re .....

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..... expenses and the sale price of the undivided share in the land at the rate of ₹ 150/- per square foot payable by the intending purchasers as per Article 6 hereof. 8.3 The amount payable to the First Party under Article 8.1 be paid together with the sale price of the land after the completion of each phase of the development in all respects as per the statement of accounts duly audited by a reputed firm of Chartered Accountants appointed by the Second Party. ARTICLE 9 For the purpose of carrying out the development of the contract property as contemplated in this Agreement, the First Party hereby assures the Second Party that: 9.1 The contract property is freehold land and is free from all acquisitions, encumbrances, charges, gifts, lien, attachments, liabilities unauthorized occupations, claim and litigation of any manner whatsoever and that except a few tenants who are in occupation of the buildings situate in a part of the contract property facing the road, there are no other tenants in the contract property. 9.2 The First Party hereby agrees and undertakes to keep the contract property free from all encumbrances, charges and liens for the durati .....

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..... very Water III/IV Stage after the date of this Agreement, such escalation shall be borne by the project). 10.3 At its own cost and expense to protect the vacant possession of the contract property and facilitate the commencement and completion of the development of the Second Party. 10.4 To do all acts necessary to procure the transfer of title in the contract property and the mutation thereof to itself and promptly deposit the title deeds including the registered sale deeds in his favour for the contract property with the Second Party. 10.5 To sign on the request of the Second Party such documents, applications, letters and other papers as may be necessary for the development of the contract property including those required for obtaining / purchasing of the building materials and utilities like water, power, sewerage connection and otherwise for giving full and complete effect to the terms of this Agreement. ARTICLE 11 The Second Party hereby agrees and convenants as follows: 11.1 To co-ordinate, supervise and mainly to carrying out the development of the contract property. 11.2 To promote and carry out marketing campaigns for the sale of the .....

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..... 0) days of receipt of all the approvals from the Government and / or Reserve Bank of India. Provided also that 14.5 Until the completion of the project, there shall not be any change in the constitution of the Board of Directors of the Company without the First Party's consent. Provided further that 14.6 If the Second Party opts not to assign this Agreement, he shall apply for the obtain the approvals of the Government and / or the Reserve Bank of India as may be applicable. ARTICLE 15 All notices required or permitted to be transmitted to any party under or pursuant to the provisions contained in this Agreement shall be sent to the addresses of the parties given at the commencement of this Agreement and shall deemed to have been served on the parties if sent by Registered Post Acknowledgement Due. 23. A reading of the above clearly show that a profit sharing ratio of 40:60 is agreed between the parties and assessee was to give the property as a collateral security for raising loans for funding the project. The value of the land has been fixed at ₹ 150/sq.ft which was to be paid only after completion of each phase of the project. Apar .....

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..... as Shri. Pradeepkumar Sharma who later assigned his rights to M/s. PDP. Ltd., had one common intention. That was to develop the property, sell the flats and share the profits. No doubt a price of ₹ 150/- sq.ft for the land has been fixed, but land was the capital to be introduced by the assessee for the purpose of endeavour. That assessee had considerable stake, is clear from the fact that assessee was obliged to offer the land as security for raising loans. Assessee had parted with possession with clear knowledge that it was entitled only to 40% of the net profits after the deduction of value of land at the rate of ₹ 150/- sq. ft. Thus the intention of the assessee was to reap and share in the profit on eventual sale of flats to be constructed and not to transfer property as such to M/s. PDP Ltd., In our opinion the essential conditions for forming an AOP as set out by the Apex Court in the case of Indra Balakrishnan Supra were satisfied. The two parties had voluntarily combined, they had combined for a common purpose and their main objective was to produce profit. 26. Once we conclude that there indeed was an AOP, the 2nd question is whether there was an inciden .....

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..... on the Schedule Property. The second party is entitled to continue to carry out the developments and construction as provided therein for the project SPRINGFIELD and the first party covenants that they shall not interfere with such development and construction. (2) The first party does hereby assign, transfer and convey all the Agreement for sale of undivided share on the Schedule property of the project SPRINGFIELD entered into by the first party through the nominees of the second party who have acted under the terms of the said Power of Attorney. The Second Party has the right to retain the consideration received in the name of the first party in pursuance to the said Agreements of the Sale and also receive the remainder consideration in the name of the second party or their nominee or assign. The second party shall indemnify and keep the first party indemnified as against any claim made by any person as per such Agreements of Sale. (3) The first party do hereby ratify all the acts and deeds done by the nominee to the second party in pursuance to the said powers of attorney as to the project viz., Spring fields the various steps taken. The second party through th .....

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..... Development Agreement and to convey the absolute right, title or interest in the Schedule Property free from all encumbrance/claims/lis and, a sum of Rupees Twenty Crores (Indian Rupees) and in consideration thereof the first party shall forego all their rights under the Development Agreement and shall convey the Schedule Property to the second party or their nominees or assigns and shall release the second party of all their obligations to first party in the past, present and further the first party shall perform all such acts and deeds as provided herein. (2) The party of the Second Part agree to pay the aforesaid consideration within sixty days from this day to the first party. (3) Out of the total sum of a sum of Rupees Twenty Crores, a sum of Rupees Fourteen Crores shall be paid to the first party for foregoing their rights under the Development Agreement and the remainder sum of Rupees Six Crores shall be paid for the sale and purchase of the Schedule Property by the first party to the second party or their nominees or assigns. (4) The Consideration of Rupees Twenty Crores (Indian Rupees) for foregoing the rights of the first party under the Development Agreeme .....

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..... n their name or their nominee name, the stamp duty shall be borne by the second party. b. The second party shall pay the first party the remainder sum of Rupees Six Crores within 60 days from this date which shall be appropriated as Sale consideration for conveyance of the Schedule Property in favour of the second party or their nominees. The said sum shall be paid in the following manner: i. By Appropriating ₹ 1,50,20,000/-(Rupees one crore fifty lakhs twenty thousand only) which has already been received by the first party, the receipt of which the first party admits and acknowledge as per the appropriation receipt annexed hereto. ii. A sum of Rupees Two Crores shall be paid on the execution of this Agreement. The first party admits and acknowledges the said sum received as per cheque No.952242, drawn on Lord Krishna Bank for Rupees Fifteen Lakhs, cheque No.234650, for Rupees One Crore drawn on Lord Krishna Bank and Cheque No. 066293 for Rupees fifty lakhs drawn on Lord Krishna Bank, all dated this day, iii. The balance sum of ₹ 2,49,80,000/- (Rupees two crores, forty nine lakhs eighty thousand only) shall be paid by the second party to the firs .....

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..... pment Agreement and their rights under the Development Agreement having been foregone for the consideration received, they shall not revoke the permission and authorization given herein to the second party to enter the schedule property and continue to develop the same as the second party will be incurring expenditure for construction. (5) Provided always and notwithstanding anything contained hereinabove, in the event the second party commits breach of this Agreement the first party shall seek redressal in the manner provided herein below and not do any act unilaterally in view of the substantial consideration having already been received on this date. It is clear from Section 45(4) of the Act, that profits and gain if any, arising on transfer of capital by way of distribution of capital assets, assets is assessable in the hands of the AOP only and not in the hands of its members. The settlement deed practically put an end to the AOP and transfer of title in the land to M/s. PDP was nothing but distribution of the capital assets of the AOP on its dissolution. 28. This bring us to the next question as to whether AOP having not subjected itself to tax by filing a retu .....

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..... t of the Apex Court in the case of Oberoi Hotels Pvt. Ltd. (Supra) what assessee received would be considered as capital receipts. 30. No doubt, assessee itself had returned capital gains in the impugned assessment year, considering the land to have been transferred by it, in the relevant previous year. In our opinion, however this cannot help the case of revenue. Just because an erroneous admission of income had been made it would not make the assessee liable to tax, for the simple reason that the charge of tax is on income computed in accordance with Section 5 of the Act and not based on the admission of income where there was no income of the nature admitted.' 4. The aforesaid shows that the Tribunal mainly considered two aspects. At the time of Association of Person (hereinafter referred to as the 'AOP') was formed, the said AOP could have been considered for the taxation purpose on the ground of capital gain. But, the said AOP neither filed return nor was assessed for the purpose of taxation. The AOP was formed in the year 1995. The activities of the AOP were also continued for some time and it is only in the year 2004, on account of dispute, settlement wa .....

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