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PR. COMMISSIONER OF INCOME TAX, BANGALORE AND ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 11 (4) BANGALORE Versus M/s. IND SING DEVELOPERS P. LTD.

2016 (5) TMI 473 - KARNATAKA HIGH COURT

Capital gains - member of an AOP taxed in place of AOP - distribution of assets - relinquishment of rights - whether 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? - Held that:- The right person should be taxed and merely because the right person could not be taxed, it is not open to the Revenue to tax a wrong person. Merely because the AOP at the relevant poi .....

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e same 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:- 2-3-20 .....

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nd 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. Sanmathi, learned counsel for the appellants-Revenue. 3. It appears that the Tribunal while dealing with the said aspects has observed thus:- 16. We have perused the orders and heard the rival contentions. The question to be answered by us are (i) Was there any intention by the parties to form an AOP. (ii) If there .....

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At the time of principal agreement? (c) At the time of settlement deed? (d) At the time of execution of conveyance deed? 17. Taking up each of these questions, in a sequential manner, first we will check whether there was any AOP. For this it is required to have a look at the legal parameters, which can throw light as to under what circumstances existence of an AOP can be substantiated. Section 4 of the Act creates a charge in respect of total income of every person. Definition of "person& .....

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assessee, it must necessarily be one with an objective to produce income, profit or gains. Thus the essentials for an AOP are: (a) Two or more persons joining in a common purpose. (b) The purpose of such joining is to produce income profits or gains. (c) The combination or joining is Voluntary. 18. At this juncture it will be inappropriate if we do not mention that Explanation inserted by the Finance Act 2002, to Section 2(31) of the Act has obviated the requirement for having, production of inc .....

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enue, 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 AO .....

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aring in Paper Book pages 17 to 23 is reproduced hereunder: "This memorandum of understanding is made on this the 22nd day of May One Thousand Nine Hundred and Ninety Five (1995) between (1) Gopalakrishna Gowda, son of late Lonkappa, residing at Voderally, Thathaguni Post, Bangalore South Taluk; (2) Ind - Sing Developers Private Ltd, a Company registered under the Companies Act, 1956, having its Registered Office at 208, Westminster Complex, No.13, Cunningham Road, Bangalore 560 052, repres .....

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s. 19 and 20 together measuring 9 acres of Ambalipura village, Varthur Hobli, Bangalore South Taluk from the owners of the said survey numbers B. That the first member of the First Party has nominated the second member of the First Party to purchase the land in the above survey numbers. C. That the said land is free of all encumbrances, charges and liens and is also capable of being developed into a group housing project as per the Revised Comprehensive Development Plan - Zoning of Land Use and .....

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obligations within sixty days from this day: 1. Furnish remaining documents of title and the information called for by Messrs. King & 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 .....

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mp; 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 removal of shops on Bangalore Sarjapur Road shall be unconditional and without any obligations on the project. 4. Divert the overhead electric cable now passing through t .....

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wners to the land. Separate indemnity bonds to be executed in due course. II. Obligations of the second party 1. Preparation of the project layout plan, building plans, typical floor plans, specifications and furnish the relevant plans to the First Party for submission to the BDA for approval. 2. Appointment of Architects, Civil Engineers, surveyors and supervisors and core project team to oversee the project. 3. Manage and execute the project in accordance with the approved plans and specificat .....

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rst Party's entitlement. Finer details of the mode of sharing will be decided later. IV. Second Party shall in consultation with the First Party market and manage the entire project, including First Party's entitlements. Second Party has this day paid the First Party ₹ 5,00,000/- (Rupees five lakhs only) as consideration for this MOU vide Demand Draft No.0321124 dated 12th May 1995 drawn on Bank of India, in favour of Ind-Sing Developers Pvt. Ltd. This amount will be adjusted again .....

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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 Partrid .....

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, it is mentioned as under at paragraph b & c of the preamble. "B. In terms of the said MOU, the First Party' has substantially established the title of the present owners to the above immovable property and has now started the process of securing the title to the above land from the present owners. C. Pending the First Party securing the transfer of title to the property and pending compliance with the obligations at clauses 2, 3 and 4 of the MOU, this Agreement is being entered in .....

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reement shall prevail. ARTICLE 2 2. The property in Survey Nos.19 and 20 of Ambalipura Village, Varthur Hobli, Bangalore South Taluk is fully described in the Schedule hereunder written and delineated in red on the plan annexed hereto and hereinafter called "the contract property". The First Party hereby permits the Second Party to enter into and upon the contract property (including the land occupied by the shops, when vacated) for the purpose of carrying out the development contempla .....

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. The Second Party shall, with due regard to the prevailing market conditions and exigencies commence and complete the development of the contract property within such time schedule as the Second Party may decide in consultation 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 .....

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ond 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 responsible for rendering contract property free of all encumbrances before the title is passed on to t .....

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hasers credit to a separate account in its books and shall pay to the First Party after completion of each phase of the development as per Article 8. ARTICLE 7 7.1 The Second party has at the time of entering this Agreement paid the First Party a sum of ₹ 2,500,000/- (Rupees Two and a half million only) vide Demand Draft No. 162654 dated 12-7-1995 drawn on Canara Bank, Lavelle Road, Bangalore. This amount and ₹ 5 lakhs already received by the first Party under the MOU and further amo .....

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such deposit of the documents, the guarantee shall stand "ipso facto" revoked. ARTICLE 8 8.1 In consideration of the First Party offering the contract property for development and rendering various services and performing obligations on its part, the First Party shall be entitled to receive from the Second Party a sum equivalent to 40 per cent of the net profits arising from the sale of the apartments, subject to taxes as may be applicable. 8.2 For the purpose of Article 8.1, the net .....

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th 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, .....

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Party shall perform its obligations at clause Nos.2, 3 and 4 of the MOU within thirty (30) days hereof. As regards provision of water for the project, the First Party shall provide the source of water at its cost and the cost of infrastructure for drawing the water from the source shall be that of the project. Upon the tenants vacating the shops the First Party shall ensure that the shops are demolished and the land occupied by the shops in annexed to the main land and fenced. 9.4 The First Part .....

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agrees and covenants as follows: 10.1 At its own cost and expense, it shall furnish and provide all such information including documents, correspondences, statements and data as may reasonably be required by the Second Party in respect of the contract property and its development and selling rights including but not limited to a General Power of Attorney in favour of the Second Party or his nominee/s authorizing the attorney to do, execute and perform such acts, deeds and things as may be neces .....

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perty, including but not limited to payment of all levies at the rate prevailing as on this date payable to the Bangalore Development Authority prior to or at the time of the obtaining of the planning sanctions and approvals. (If there is any escalation in the rates of levies relating to Cauvery 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 facilit .....

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ty 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 completed development. 11.3 To maintain prope .....

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se and in a bona fide manner and in the best interest of both the parties. 12.3 All obligations and rights expressed herein are to be honoured and exercised in conformity with the principles of good faith and with mutual regard. 12.4 Matters not provided herein shall be decided through consultation conducted with sincerity between the parties. ARTICLE 13 The parties, during the term of this Agreement and thereafter, shall maintain secrecy of all confidential or proprietary information or data be .....

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the delivering party. ARTICLE 14 14.1 The First Party hereby expressly consents for the assignment of the benefits and obligations of the Second Party herein in favour of any Company whether incorporated in India or otherwise provided that assignment is made by notice in writing given by the Second Party to the First Party and on such assignment, the assignee is deemed to be aware of and bound by the terms and conditions of this Agreement. Provided that the second party shall 14.2 Take quick st .....

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ectors 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 shal .....

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by Shri. Pradeep Kumar Sharma to the assessee. Both parties had specific obligations set out in this agreement. 24. The supplementary deed dated 17.06.2002 which happened after a considerable period of time revised the profit sharing ratio from 40:60 to 20:80. But for this there were no major changes in the principal agreement. A general power of attorney was also executed by the assessee on 20.11.2002 which clearly showed that by that point of time, assessee had acquired the subject property o .....

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and also the balance purchase money and to give good, valid receipt and discharge for the same which will protect the purchaser or purchasers without seeing the application of the money. 13. Upon such receipt as aforesaid as our act and deed, to sign and execute any conveyance or conveyances of the undivided interest and / or the built area in favour of the said purchaser/s or his/her nominee or assignee. 14....... 15....... 16. TO present any such conveyance or conveyances for registration, to .....

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ement clearly shows that at the time that MOU and principal agreement was entered into, assessee was still in the process of acquiring the subject property and clearing the title of the original vendor. It is not a case of pure development agreement where one of the parties was the absolute owner. Both the assessee as well 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. .....

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he 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 t .....

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ome of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of .....

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as transferred to the AOP in the year in which assessee entered the principal agreement. This happened much before the impugned assessment year. Even if we consider that assessee could have introduced this capital in the AOP only after acquiring the property, even this happened much before the currency of the relevant previous year. Resultantly there was no capital gains on account of the land being introduced by the assessee into the AOP, during the relevant previous years. 27. Now it is neces .....

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n 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 .....

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rney as to the project viz., "Spring fields" the various steps taken. The second party through their nominee shall be entitled to continue to exercise all powers under the said Power of attorney. Article-II- Development Agreement: (1) In consideration of the representations made, obligations undertaken, covenants to be observed mutually and the consideration reserved herein, the parties have mutually agreed to enter into this agreement. (2) Due to the dispute infra, the parties have ag .....

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econd party under the Development Agreement and whereas it has been arrived at with the help of the Conciliator and on mutual agreement by the parties hereto, to amicably resolve disputes and allow the second party to peacefully develop the Schedule Property. The consideration agreed to be paid is for the first party to forego all their rights benefits entitlement and interest as provided in the Development Agreement whatsoever and to convey the Schedule Property to the second party or their nom .....

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ership of the Schedule property to the second party or their nominee or assigns which shall be free from all encumbrances, claims, lis, charges, third party interest, minor interest acquisition (etc. and henceforth the second party shall alone be in possession of the Schedule Property. Article-III- Consideration (1) The second party has agreed to pay the first party in full and final settlement for the first party as on this date foregoing all their rights in the Development Agreement and to con .....

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s 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 nom .....

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first party admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. ii. Appropriating a sum of ₹ 75,12,001/- (Rupees seventy five lakhs twelve thousand and one only) already paid by the second party to the first party the receipt of which the first party admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. iii. The second party shall pay the first party a further sum of ₹ 4,92,65,092/- .....

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ot; constructed on the Schedule Property in the Phase I within eighteen months from this day and Phase II within twenty four months from this day and which are situated in the said Apartment Complex as per the Allocation List appended hereto. The second party shall on completion of the construction of the said Apartments execute deeds of sale conveying the same along with proportionate undivided share of land in the Schedule Property in favour of the first party or their nominee or Assigns. The .....

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te the Sale deeds as to the same in 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 tw .....

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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 first party simultaneously and on executing a Deed of Conveyance conveying the absolute right, title and interest of the Schedule Property to the second party or their nominees or assigns and such sale shall be free from all encumbrances, claims, lis, charges, third party interest, minor inte .....

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ty by entering upon 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 once again reaffirm that the rights of the Second Party under the Development Agreement and the second party or their agents or contractors or architects or surveyors or work me .....

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ay lawfully require in order to obtain licenses, sanction plan for such construction and also to legally and effectively vest in the second party or its nominees title to the Schedule Property and for completing the development of the Schedule Property. The first party shall not interfere or obstruct the course of construction of the Apartment Building in view of their rights to the Schedule Property and the benefits accruing under the Development Agreement being determined as stated hereinabove .....

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he 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 .....

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in the impugned assessment year for the sum of ₹ 14 crores. That the AOP had not submitted itself for taxation or the failure of the AOP to make a return of income, would not shift the tax incidence to its members. Especially so, since charging Section 4 of the Act in contrast to Section 3 of the 1922 Act does not give any power to the assessing officer to tax a member of AOP in lieu of taxing the AOP. 29. This bring us to the next question as to whether the money received by the assessee .....

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rious duties and responsibilities that they had undertaken to do, bringing the project to a limbo and leading to the cancellation of Power of Attorney by the assessee. The parties thought that the joint development was no more feasible. Thus in lieu of the 20% share of profit which would have arisen to the assessee in future, assessee agreed to receive ₹ 14 crores. We can see it either as the share of profit, the assessee would have received in future from the AOP or a capital receipt. Bot .....

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ed. Admittedly assessee was not holding any other land or fixed asset as it is clear from the Balance Sheet placed at paper book page no. 13. By virtue of the judgment 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 .....

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