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2018 (4) TMI 621

d in its all three agreements does not amount to part performance requiring compulsory registration u/s.17 of the Registration Act. We therefore conclude in this view of all this evidence as well as legal position that the impugned compensation amount is not liable to be treated as income u/s.2(24) of the Act nor the same is taxable as capital gain for business income being in the nature of a capital receipt. - Compensation sum as in facts of the instant case is not a business income as well since not covered under specific instances u/s.28(va) of the Act. The Revenue’s stands therefore holding both development and cancellation agreements in all cases is not sustainable in view of the same unregistered documents does not carry any merit as Section 17 of the Registration Law could not have been applied in view of bar on transfer of the lands in question. We thus observe that assessee’s above development license acquired in its all three agreements does not amount to part performance requiring compulsory registration u/s.17 of the Registration Act. We therefore conclude in this view of all this evidence as well as legal position that the impugned compensation amount is not liable .....

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ving surrendered its pre-emptive right(s) to purchase/develop the above land being annulled in cancellation agreements. The two sets of vendors hereinabove terminated their corresponding obligations on 30.06.2008 and 27.09.2008. The said vendors relied upon identical compensation/damages clauses relating to assessee s goodwill loss arising from the cancellation hereinabove in order to part with their money in question. It is evident from the said cancellation agreements that the assessee undertook to surrender all of its right acquired in above development agreements. Both vendor(s) and vendee treated the impugned compensation to be paid in lieu of terminating right to sue for preemptive purchase. The individual vendors herein thereafter executed their registered sale deeds dated 30.06.2008 and 27.09.2008 in favour of third parties for consideration money of ₹ 2,28,12,111/- & ₹ 1,37,94,000/-; respectively. Paper book page 49 in assessee s P&L account reveals that the assessee treated the above sum totaling to ₹ 3,87,27,804/- as income in the nature of compensation/damages received. 4. We advert to assessment order dated 15.12.2011 now. Assessing Officer to .....

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opment agreement with individuals. In the third case the agreement is with society for Project Consultancy. In all cases similar agreement was entered into by the appellant. All agreements provided for compensation if the development does not take off, as also the pre-emptive right to purchase the property if the owners decide not to go ahead with the development. B. If the project had gone through as originally contemplated by the appellant as well as the land owner, then the appellant would have earned income in the nature of business profits. Such profits would have been earned for one year or for few years. The profits would not have continued for a long time so as to qualify to become source of business. C. The rights acquired by the appellant were in the nature business right D. It is seen that in the earlier year also the appellant had derived profits from compensation amounting to ₹ 5.4 crores on surrender of right to sue and claimed the same as capital receipt. During the year the appellant had entered into as many as three such agreements and all of them ended with the appellant benefitting on account of surrender of right to sue. A coincidence happening too many ti .....

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,00,000 Sold Paid appellant to H. From the reading of the development agreements in the first case in the above table, following salient features emerge: a. In respect of land at Survey no. 232, Village Moje, the agreement was executed on a stamp paper of ₹ 100/-. This stamp paper was purchased on 11/03/2008 bearing no. G116669. The agreement was executed on 18/03/2008. The termination agreement was executed on 27/09/2008 on a stamp paper which was purchased on S/09/2008, It may be highlighted here that the sale to the third party took place on 15.09.2008 i.e. after the date of stamp paper purchase for the termination agreement which was executed within 12 days from such sale. b. Under Clause 2.4 of the agreement the appellant (developer) have promised to pay a sum of Rsx 95 lacs to the land Owners. The developer was supposed to carry out the development activities, incur the expenses and enjoy the consideration and the resultant profits. No amount was paid by the appellant to the owners of the land. c. As per clause 5.2 of the above agreement the developer i.e. appellant has confirmed having taken over the possession of the land at the time of execution of the agreement. d. .....

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s been further agreed by and between the parties to this agreement that in ease of termination of this agreement by the owners for any reason whatsoever, as mentioned in para 6.11 hereinabove, then the position of the said land shall remain with the developers until they decide not to exercise the right of pre-emptive purchase of the said land as given in the Para 6.12 herein above. f. In clause 13.1 it has been provided that in case of dispute between the parties, Shri IH Syed, Advocate would act as mediator and his decision shall be final and binding on both the parties. g. From overall reading of the agreements it is seen that the owners Mere to Benefit to this extent of ₹ 95 lacs if the development agreement went through. However, on cancellation they have gained only to the tune of ₹ 22.94 lacs whereas the appellant have benefited by a whopping sum of ₹ 1.15 crores and that too without investing a single rupee. I. Identical development agreement has been executed by the appellant in respect of land in Survey no. 232/1+2, Village Moje, except for the difference that the amount to be paid by the developer i.e. appellant to the owner was committed at ₹ 81 .....

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was with the appellant earlier was given by the appellant to the owners back. Hence the appellant was fully aware of the transaction, No legal notice was ever given by the appellant to the owners for contravention of the development agreement. Q. From perusal of the copy of termination agreement with the society it is seen that there is no subsequent sale by the Society to any third party. The society could not obtain necessary permissions and therefore the compensation is stated to have been paid. Clause no. 16 and 25 of the agreement with the society specifically deal with the compensation to be paid to the appellant in case of the agreement not being followed. R. In case of development agreements, the compensation payment on termination of the agreement has been provided in the development agreement in clause 6.11. Hence the compensation has been received by the appellant as part of the agreement for termination. The claim of surrender of the right to sue is merely a shelter claimed by the appellant to get the benefit from Income Tax. If it was right to sue then there should be some semblance of the efforts made by the appellant to sue the owners. The termination agreements hav .....

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nsactions as completed or concluded transfers or as conveyances as they nether convey title nor create any interest in an immovable property. U. If legally the facts are examined then appellant had no case before the court of law to sue for specific performance. The development agreement was not registered. The appellant had hot paid a single penny to the owners in two cases and in the third case of society only an amount of ₹ 1454000/- was paid, which was miniscule when compared to the ultimate sale price of the land; In absence of any step taken by the appellant and in view of the fact that the agreements were not registered, appellant had no enforceable claim in the eyes of law; Hence what was received was only possible by way of mutual consultation within the terms of agreement and that too only because the owners wanted to respect the agreement. The compensation clause was very much a part of the development agreement and therefore the compensation received by the appellant was within the purview of the development agreement. The compensation was in course 5 of the normal business activities of the appellant It can be at best be described as consideration against loss of .....

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It is further provided that the nature and the amount of each extraordinary item should be separately disclosed in the statement of profit arid loss in a manner that its impact on current profit or loss can be perceived. However, in the annual report of the appellant company, it has been clearly mentioned with regard to the financial performance that During the year under report, the company has achieved a gross income of ₹ 3 87.28 lakhs as compared to ₹ 5 40.02 lakhs during the previous year and the operations for the year under review have resulted into net profit of rupees to 91.79 lakhs. Your company could achieve sustained growth in business due to continued pursuit of our strategy to work with innovation ideas and developing new areas of Its activities or stop directors are hoping even better performance during the current year." This clearly indicates that the amount of compensation has been received in course of regular business activity and is to be considered as business income. The income received on account of .compensation has been included in; the profit and. loss account as compensation / damages received however there is no remark in the annual repo .....

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ion 14 and section 56. Therefore, the finding of all the lower authorities, that the amount in issue received by the appellant was an income taxable under the Act, was to be confirmed. [Para 9] On facts, it was clear that the assessee had not received the amount in issue from D towards either acquiring or releasing or relinquishing any right or title or interest whatsoever in the immovable property. He was paid separately, for relinquishing his interest in the immovable property, an appropriate amount along with interest. Obviously, therefore, the amount in issue could not be said to be an amount received by the assessee as compensation for relinquishing his interest in the immovable property and, therefore, could not be considered under the head Capital gains . [Para 11] It is true that the term property used in section 2(14) is to be interpreted widely, and that it will include any right, title or interest in the immovable property, as also right to obtain conveyance(s) of the immovable property. However, in the instant case, the assessee had failed to correlate the amount paid by D towards any such right. As the assessee had failed to show that the amount in issue was paid to hi .....

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llant was in the business of realty and therefore in my opinion the AO has correctly taxed it as income under the Head Business and Profession. 2.4 In View of the above discussions, I hold that the income from the business operation earned by the appellant being a part and parcel of the conditions of the development agreement has to be considered as taxable business income. The action of the A.O. in treating the compensation shown by the appellant as revenue receipt is accordingly confirmed. The first ground of appeal including sub grounds 1 to 7 is accordingly dismissed. 7. Mr. Dhiren Shah appears for the assessee as its authorized representative. He first of all reiterates the above narrated facts once again regarding assessee s three development agreements followed by termination thereof and execution of sale deeds by vendors in favour of third parties. He submits that the above vendors compensated the assessee in lieu of getting its right to sue arising from breach of development agreement surrendered. He refers to Section 6(e) of the transfer of property Act, 1882 envisaging a mere right to sue to be not transferable since not a property. Case law of Baroda Cement & Chemic .....

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is concerned, it is altogether in different context. There is no dispute with regard to the proposition that transfer of an immovable property having value of more than ₹ 100/- can only be completed by way of registered sale deed, as contemplated in section 17 of the Registration Act. This judgment deals with the concept of power of attorney, lease, licence etc. Definition of expression transfer provided in section 2(47) is more wider than in the general law. As observed earlier, while dealing with the issue no.(ii), the expression transfer employed in section 2(47) includes (a) any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the TPA, and (b) any transaction entered into in any manner which has the effect of transferring, or enabling the enjoyment of, any immovable property. In these two eventualities, profits on account of capital gains would be taxable in the year in which such transactions are entered into, even if a transfer of immovable property is not effective or completed under the general law. In the present case, there is a fine distinction which remained un-noticed at the en .....

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s resolved the controversy and held that such unregistered agreement can be produced as evidence in suit for specific performance. It can be made basis of suit for specific performance. The finding recorded by the Hon ble Punjab & Haryana High Court in this case reported in (2013) 1 PLR 195 as under: 11. A conjoint appraisal of sections 53A of the Transfer of Property Act, 1882, sections 17(1A) and 49 of the Indian Registration Act, 1908, particularly the proviso to section 49 of the Indian Registration Act, in our considered opinion, leaves no ambiguity that, though, a contract accompanied by delivery of possession or executed in favour of a person in possession, is compulsorily registrable under section 17(1A) of the Registration Act, 1908, but the failure to register such a contract would only deprive the person in possession of any benefit conferred by section 53A of the 1882 Act. The proviso to section 49 of the Indian Registration Act clearly postulates that non-registration of such a contract would not prohibit the filing of a suit for specific performance based upon such an agreement or the leading of such an unregistered agreement into evidence. 12. A suit for specific .....

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ld get the amounts only agreed upon by way of agreement dated 4.4.2008. She could be charged for capital gain on this amount only. Even for argument s sake, the reasons of the Revenue authorities are being accepted that the agreements dated 4.4.2008 and 2.3.2009 are unregistered, therefore, they shall not goad the adjudicator to construe part performance of the contract u/s.53A of T.P. Act and no transfer of the land could be construed within the meaning of section2(47)(v) of the Act. In that situation, only the year of taxability could be shifted i.e. effective date for transfer of capital asset could be taken to 27.1.2010. How the AO can bring the amount for taxation in the hands of the assessee ? Under issue No.(i), we have discussed the nature of right acquired by SDS by virtue of agreement dated 4.4.2008. Suppose the agreement was not honored and suit for specific performance was filed by the assessee for persuading the SDS to purchase the land in dispute. During the pendency of the Civil Suit SDS assigned his right to a third party and ultimately that third party agreed for purchase of suit land. A settlement is arrived. The assessee would get only a consideration agreed upon .....

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suspicious circumstances leading to the impugned addition as discussed in lower appellate findings. 12. Learned Departmental Representative thereafter reiterates CIT(A) s discussion to contend that the assessee itself had influenced the vendors concerned to terminate the development agreements. It terms all these transactions set up to be a case of re-routing of unaccounted income being brought to the system through farmers/agriculturists. Learned Departmental Representative reiterates that no vendor in facts of the instant case would agree to such paltry gains as against the assessee deriving huge amounts of exempt income. The same is stated to be a case of human improbability. 13. Mr. Madhusudan continues his vehement support to CIT(A) s specific illustration in clauses A to Z. His case is that the assessee has made an attempt to evade payment of taxes than tax planning as held in hon ble apex court s decision in Mc Dowell s case. He thereafter opposes assessee s right to sue plea by contending that it had not undertaken any step to enforce the relevant development agreements. He then refers to the relevant terms in said development agreement stating to have delivered possession .....

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as business income or capital gains. The Revenue on the other hand draws support from both the lower authorities action assessing the same as business income. The assessee admittedly is in real estate development business. It entered into the above identical verdict three development agreements with as many vendor parties followed by the latter paying it variable amounts in question totaling to ₹ 3.87 crores in lieu of getting former s right to preemptive purchase or right to sue for specific performance surrendered in their favour. There is no evidence in the case file indicating the assessee to have undertaken even a single activity of development is all three parcels of land. We notice in this factual backdrop that hon ble jurisdictional high court s decision in Baroda Cement and Chemical case (supra) holds that the amount received in lieu of such a right to sue available after a vendor breaching the relevant agreement is not an actionable claim so as to be transferred u/s.6(e) of the Transfer and Property Act giving rise to assessable capital gains. Their lordships of Calcutta High Court (supra) further reiterate the same view Mr. Madhusudan s case is that the amount in .....

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es in computation of their respective income without questioning any genuineness element therein. So is the outcome of Revenue s next plea that the assessee had surrendered its right to sue without taking any legal recourse. We observe in this context with the assessee could very well be treated as an aggrieved party against its vendors action executing sale deed in favour of third party vendees. The Revenue s argument that the cancellation document had been purchased well in advance is also not relevant since it is not mandatory that the same ought to have been purchased on the date of cancellation only. What is material in these facts is that there should be a valid document. There is no bar in stamp law that any party cannot purchase such documents in advance. The Revenue fails to quote any such rule which could be held as to have been violated in such an advance purchase of stamp papers. We find that Revenue s further argument that no prudent assessee would enter into such a transaction also does not deserve acceptance since the assessee in fact has acted as a prudent entity wherein it succeeded in excessive compensation amount not otherwise taxable being in the nature of capit .....

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