B.Ramakotaiah, Member (A) -
(1.) THIS appeal by assessee is against the order of Ld. CIT(A) -V, Hyderabad dated 27.02.2013. Assessee in the course of present appeal filed concise revised grounds which are as under:
"1. "The order of the learned Commissioner (Appeals) is bad in law and against the facts of the case.
2.THE learned Commissioner (Appeals) erred in confirming the addition of Rs. 7,98,69,745/ - under the head short term capital gains. The learned Commissioner (Appeals) failed to appreciate the fact that there was no transfer of a capital asset u/s. 2(47) or u/s. 45(3) of the Income Tax Act, 1961.
3.1. The learned Commissioner (Appeals) erred in holding that there was a transfer of capital asset within the meaning of Sec 45(3), when there was no transfer u/s. 2(47) of the Income Tax Act, 1961.
3.2. The learned Commissioner (Appeals) failed to appreciate the fact that the assessee did not possess any capital asset which it was capable of transferring.
3.3. The learned Commissioner (Appeals) erred in relying on the general covenants in the agreement which do not determine the transfer.
3.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.
4. 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 whose statement the reliance has been placed by him.
Without prejudice, the learned assessing officer failed to appreciate the fact that if at all there was any capital gains, then the same should have been treated as long term and the date of acquisition should have been treated as 8th Jan 2001.
5.THE assessment order and demand notice are not sustainable since the assessment year mentioned in the order is 2007 -08 whereas the demand notice pertains to the assessment year 2005 -06.
For the above grounds or any other grounds that may be submitted at the time of hearing, the assessee prays that the appeal allowed and the addition of capital gains made by the learned assessing officer and confirmed by the learned Commissioner (Appeals) be deleted with consequential relief."
(2.) Briefly stated, assessee is engaged in the business of providing telecom net work services. Assessee filed its return of income for A.Y. 2005 -06 on 25.10.2005 declaring total income of Rs. 2,06,27,320. Notice under section 148 of the I.T. Act was issued in pursuance of material gathered at the time of survey under section 133A conducted in the case of M/s. Embassy Builders on 23.09.2008. One of the documents impounded was a consortium agreement dated 10.12.2004 entered into by assessee with M/s. Dynasty Developers P. Ltd., and the new entity was called Embassy -ANL Consortium. Based on the documents, assessment was reopened. The issue in appeal is with reference to development agreement entered by assessee with the said M/s. Dynasty Developers P. Ltd., ("DDPL"). Assessee has been allotted ac.6.00 of land on lease -cum -sale basis by Karnataka Industrial Area Development Board (in short "KIADB") vide letter of allotment dated 10.01.2001. Subsequently, assessee entered into lease -cum -sale deed on 02.09.2003 with KIADB. On 10.12.2004, Assessee entered into the consortium agreement referred above. As per the consortium agreement, assessee agreed to transfer the rights in the property. Since, there are differences among the parties, assessee did not acknowledge the receipts in its audited accounts and continued to show the lease hold rights on the land as fixed assets in the books of accounts. AO initiated proceedings as Capital gains on transfer of property was not declared. Pursuant to notice under section 148, assessee submitted to the A.O. that it was not liable to capital 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 consortium at Rs. 10,76,61,044 as 'full value of consideration' and considering the fact that assessee entered into the agreement immediately on getting the ownership held that the period of holding is less than 12 months and accordingly, considered the gains as short term capital gain. He brought an amount of Rs. 7,98,69,745 to tax as short term capital gain.
(3.) Being aggrieved, assessee contested before the Ld. CIT(A) that assessee did not possess any 'capital asset' and the land allotted by KIADB as per lease -cum - sale agreement does not give ownership rights and it can not be considered as immovable property and therefore, a capital asset. Without prejudice to the above, assessee also contended that it did not obtain any transferable lease hold rights over the land and as per clause -8 of the allotment any failure to fulfill any of the standard terms and conditions shall result in cancellation of the allotment. It was submitted that clause -12 of the terms and conditions stipulates that no permission will be granted to lease out any portion of the building or any portion of the land in favour of other entrepreneurs during the existence of lease period. Referring to the other clauses of the allotment letter, it contended that assessee did not possess any transferable lease hold rights and therefore, the land in question is not a capital asset. Further, it also contended that provision of section 2(47) are not applicable as the property is not an immovable property, as was given in clause (d) of section 269UA of the I.T. Act. It was contended that assessee has only lease hold rights and it did not fall into the definition of 'immovable property'. It further contended that there was no transfer under section 45(3) of the Act as it was only a legal fiction. It was submitted that as there is no assignment of rights executed, there is no transfer, consequently, no capital gains can be assessed in the hands of assessee by invoking the provisions of section 45(3). Ld. CIT(A) did not agree and confirmed the capital gains in the hands of assessee. The relevant observations of Ld. CIT(A) are as under:
"7. I have gone through the assessment order, submissions of the assessee, evidences filed by the assessee and case laws relied upon by both the parties. The basic contention of the assessee is that they do not possess transferable right over the land allotted 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 Rs. 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 extent of 36 crores plus interest and other charges, for advances made to Dynasty Developers P Ltd."
7.1 Going by the above notes to the accounts, the company is admitting that it has some rights over the property which it had acquired through lease -cum -sale agreement. On the contrary, during the course of appeal proceedings, the assessee claims that the lease -cum -sale agreement can only be treated as a right to obtain an immovable property and cannot be treated as capital asset. Of these two - the admission made by the assessee in the notes to accounts and the claim made during appeal proceedings - to me, the notes to accounts carry much credence since the same was a result of consensus in the Board meetings of the company and finally approved by the Board of Directors. Therefore, the first argument put forth by the assessee is rejected. When the facts of the case prove otherwise. the case laws relied upon by the assessee become distinguishable and the assessee cannot take any strength from these decisions.
7.2. The next argument of the assessee is that there is no transfer within the meaning of section 2(47) of the Act. Referring clause (vi) of section 2(47), the assessee insisted on the term immovable property and its definition, its application to their own case. Here, it is the argument of the assessee that since they do not hold any right over the property and they have only a right to purchase the property (by virtue of lease -cum - sale agreement entered into with KIADB), the land in question cannot be treated as an immovable property in the hands of the assessee. In this regard, it is pertinent to refer: to para 8 of the Consortium agreement between the assessee company and M/s. DDPL. Relevant portion of the Consortium agreement is as under:
"8.1 ANL assures the undertaking and the Dynasty as under:
1.1 The scheduled property has been allotted to ANL and the possession of the scheduled property has also been given to ANL and ANL is entitled to develop the scheduled. property as an infrastructure/commercial development within the existing rules of KIADB.
8.1.2 ANL has further assured that there is no and there would be no impediment under any law, order, decree or contract for the development of the scheduled property and subsequent thereto for the development of the scheduled property and subsequent thereto for the sale or lease of such development 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 of scheduled property. It is hard to go by the argument of the assessee that on one hand it claims that they have no right over the property since they possess only a right to purchase the property and not a right over the property, and on the other hand, going by the assurances given in the Consortium agreement the assessee assures that there is no impediment under any law, order, decree or contract for the development of schedule property. Here again the inconsistencies between the contents of the Consortium agreement and the arguments made during the course of assessment and present appeal proceedings leads to a justifiable conclusion that the assessee is making contrary claims to suit its needs. In the course of assuring M/s. DDPL, the assessee goes to show that there will not be any impediment under any law in developing the land in question. When it comes to the question of immovable property, it says that it has limited right to purchase the property and not a right over the property. If the claim of the assessee that it had no right over the property is to be accepted, then the question that arises is in what capacity the assessee had assured its Consortium constituent over the property? Certainly the assessee had seen a right over the land allotted' to it by KIADB and accordingly they entered into an agreement for development of property with M/s. DDPL.
7.4. It is also pertinent to mention here that the assessee got the land registered in its name on 27.08.2007 by KIADB. Here, one may bring out a logic that since the assessee got a full right over the property by virtue of sale agreement registered in its name only in the year 2007 and therefore, the treatment given by the Assessing Officer in his assessment order basing on the facts as stood for the FY 2004 -05 do not hold good. In this context. it is pertinent to refer to the books of account of the Consortium JV. In the books of account of Consortium JV as on 31.03.2006, fixed assets (land) is debited with Rs. 10,76,61,044/ - and M/s. Andhra Networks Ltd. capital account is credited with Rs. 10,76,61,044/ -. These books of the JV were audited by a statutory auditor and this credit recorded in. the books of JV is in tune with para 9 of the consortium agreement dealing with capital. Under para 9 of Consortium agreement, it was mentioned as under:
Anl would contribute, 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 Rs. 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 assessee is changing its stances over the land in question to suit its needs and the argument of the assessee that it has only a right to purchase the land and not a right over the land fails miserably.
7.6. The third and final argument taken by the assessee is that there is no transfer under section 45(3) of the Act. In this regard. the assessee contended that the 'consortium agreement cannot be treated as an AOP since clause 18 of the agreement clearly stipulates that each party shall pay their respective taxes on the income distributed. The next aspect the assessee brought out is that they do not possess any capital asset and there was no transfer of the same. It was also brought out that there is no assignment agreement other than the Consortium agreement and clause 9.1 under which the assessee agreed to transfer the right cannot be treated as transfer of rights.
Though the assessee claimed that the contents of clause 9.1, wherein the assessee agreed to transfer the rights cannot be treated as transfer, no. reasons were adduced for such claim. However, the said clause has already been discussed above and it was held that the assessee by virtue of the lease -cum -sale agreement entered into with KIADB contributed the value of this land as its capital. Therefore, the land in question is treated as capital asset and the same was agreed to be transferred to M/s. DDPL, the developer.
7.7. Since all the arguments put forth by the assessee were proved to be factually incorrect, the land in question is treated capital asset in the hands. of the assessee and there is transfer of such asset within the meaning of section 2(47)(vi) of the Act. Accordingly, I see no reason to deviate from the treatment given by the Assessing Officer to this transaction and I uphold the action of the Assessing Officer in taxing the consideration contributed as capital to the JV, as capital gains in the hands of the assessee".;