Kushal Kumar Kankaria, Hyderabad vs Assessee

Kushal Kumar Kankaria, vs. Asst. Commissioner of Income- Hyderabad tax, Central Circle - 1, PAN - ACEPJ2001J Hyderabad. (Appellant) (Respondent)

ITA No. 674/Hyd/2012 Assessment Year: 2008-09

Dinesh Kumar Kankaria, vs. Asst. Commissioner of Income- Hyderabad tax, Central Circle - 1, PAN - AENPK9804K Hyderabad. (Appellant) (Respondent)

ITA No. 675/Hyd/2012 Assessment Year: 2008-09

Sanjay Kumar Kankaria, Asst. Commissioner of Income- Hyderabad tax, Central Circle - 1, PAN - ACEPJ2003L Hyderabad. (Appellant) (Respondent)

Assessee by : Shri Y. Ratnakar Revenue by : Smt. G. Aparna Rao

Date of hearing 12-03-2015 Date of pronouncement 10-04-2015

PER SAKTIJIT DEY, J.M.:

These appeals by three different assessees are directed against separate orders of ld. CIT-III passed u/s 263 of the Act, for the AY 2008-

09. 2 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

2. Since the facts and issues involved in these appeals are identical, for the sake of convenience, we will discuss the facts as involved in ITA No. 673/Hyd/12.

3. Briefly stated, assessee is an individual. For the AY year consideration, assessee filed his return of income on 11/09/09 declaring total income of Rs. 1,22,100. A search and seizure operation was conducted in case of assessee on 11/09/07 and assessment incase of assessee was completed u/s 143(3) read with section 153A vide order dated 09/12/09. Ld. CIT while examining the assessment records of assessee for the year under consideration was of the view that assessment order passed is erroneous and prejudicial to the interests of revenue, as AO has failed to bring to tax the capital gain arising from transfer of land to the developer under development agreement. Accordingly, he issued a notice u/s 263 of the Act to assessee to show cause as to why assessment order should not be revised. In response to the said show cause notice, it was submitted by assessee that the development agreement executed with the developer is only a joint venture agreement for the purpose of development of the property in to a commercial complex and thereafter sharing the constructed area in the ratio provided in the development agreement. The possession given to the developer is only for the purpose of construction of the commercial complex as per the terms and conditions agreed upon. Assessee submitted, 'transfer' liable to capital gain will occur only when the constructed area falling to the share of the land owner is handed over to him by the developer and not before. It was submitted, at the time of development agreement no consideration passes to the owner as the constructed area contemplated therein did not exist but will come into existence only at a later date. The security deposits taken is only to guard against the obligation to be carried out by the developer under the development agreement. In support of such contention, assessee relied upon some decisions of ITAT.

3 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

4. Ld. CIT after considering the submissions of assessee, observed that after amendment of definition of 'transfer' as envisaged u/s 2(47) of the Act, any transaction involving allowing of possession to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Properties Act would come within the ambit of section 2(47)(v). Thus, assessee having entered into a development agreement and delivered possession, there is transfer of capital asset within the meaning of section 2(47)(v) during the relevant PY. In this context, ld. CIT relied upon a decision of the ITAT, Hyderabad Bench in case of Dr. Maya Chenoy Vs. ACIT. Ld. CIT further observed that assessee along with other two coowners have executed a registered sale deed-cum-GPA on 07/06/10 with the same developer and the amount which was received by assessee along with coowners towards advance on 16/04/07 was declared as full and final sale consideration. From this, ld. CIT inferred that assessee's claim that he has entered into a development agreement and not a sale is proved to be incorrect. Ld. CIT observed, with an intention to postpone tax liability assessee has tried to give the transaction a different colour. Accordingly, ld. CIT directed AO to compute the capital gain in the impugned AY. Being aggrieved of the order passed by ld. CIT, assessee has preferred appeal before us raising number of grounds challenging the order passed u/s 263 both on jurisdictional issue as well as on merits.

5. In course of hearing, ld. AR also has raised the following additional grounds:

"1. The appellant contends that in the facts and circumstances of the case the subject matter relating to the levy of tax on capital gains pursuant to the development agreement is debatable, not free from doubt and on which divergent views are possible. Hence the ld. CIT could not have exercised his revisionary jurisdiction u/s 263 of the IT Act.

2. It is contended that the facts obtaining in the above appeal, independent of the legal issue also reveal that the issue is debatable and controversial. Hence the CIT could not have exercised his jurisdiction u/s 263 of the IT Act."

4 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

6. Ld. AR submitted before us that assessee along with his two brothers have jointly purchased the land situated in plot No. 8-2- 293/82/A/714 -714/a in road No. 6, Jubilee Hills, Hyderabad vide registered sale deeds executed on 26/02/05 for land admeasuring 1280 sq.yds. with built up area of 600 sq.ft. for a total consideration of Rs. 1,05,60,000. Subsequently, assessee has transferred his share in the property admeasuring 426 sq.yds. along with built up area of 200 sq.ft. to his wife Smt. Chhaya Devi Kankaria. It was submitted, though, as per the general law a sale is yet to be completed, however, as far as the income-tax Act is concerned, transfer of the asset has taken place in favour of Smt. Chhaya Devi Kankaria at the time of execution of the registered agreement of sale-cum-GPA on 04/04/06, hence, no capital gain can be assessed at the hands of assessee as he no longer was the owner of the property. Further, ld. AR submitted, mere development agreement cannot be treated as deemed transfer under the income-tax Act. He submitted, as developer was not ready and willing to perform his part due to dispute between the land owners and the developer, development agreement dated 16/04/07 had to be cancelled by a MoU dated 06/06/10.

It was submitted, a sale deed was ultimately executed on 07/06/10 selling property to the developer, only for the reason, the developer was not willing to perform his part of the obligations under the development agreement nor was he cooperating in relegating the parties to their original position. Therefore, property was sold by land owners for a consideration of Rs. 7.20 crore. It was submitted, as the property was finally sold during FY 2010-11, the capital gain was declared by land owners in AY 2011-12. Ld. AR submitted, in any case of the matter, whether there is transfer in pursuance to the development agreement is a debatable issue as more than one view is possible due to divergent views expressed by different high courts as well as different benches of the Tribunal. Therefore, if the view taken by AO is one of the possible view, then, power u/s 263 of the Act cannot be invoked to set aside such view of AO. Alternatively, it was contended by ld. AR, if ld. CIT felt that there was absence of enquiry and non-application of mind by AO, then, he should have directed AO to examine the issue instead of 5 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

straightway directing him to compute capital gain. In support of such contention, ld. AR relied upon the following decisions:

1. Suraj Lamp & Industries (P) Ltd., Vs. State of Haryana, 340 ITR 01 (SC)

2. Parvez Nazir Hussein Jafri Vs. CIT 354 ITR 235 (SC)

3. CIT Vs. Max India Ltd. 295 ITR 282 (SC)

4. CIT Vs. Greenworld Corporation 314 ITR 81 (SC)

5. CIT Vs. Ansal Properties & Industries (P) Ltd. 315 ITR 225 (Del.)

6. CIT Vs. Munjal Castings 303 ITR 23 (P&H)

7. CIT Vs. Asma Exports 305 ITR 332 (Mad.)

8. CIT Vs. DLF Ltd., 350 ITR 555 (Del.)

9. Spectra Shares and Scrips P. Ltd. Vs. CIT, 354 ITR 35 (A.P.)

10. Binjusaria Properties Pvt. Ltd. Vs. ACIT, ITA No. 157/Hyd/2011, dated 04/04/2014.

11. ACIT Vs. R. Srinivasa Rao in ITA No. 1786/Hyd/12 and others Dated 28/08/14

7. Ld. DR contesting the claim of assessee submitted before us, assessment order would clearly reveal that AO has neither enquired into the matter nor has applied mind to the materials on record. Therefore, when AO has not taken any view at all, it cannot be said that the view taken by AO is one of the possible view. Ld. DR referring to the development agreement submitted before us, development agreement clearly establishes the fact that assessee has transferred the land to the developer in terms with the development agreement for a consideration. Therefore, once the possession is delivered there is a transfer within the meaning of section 2(47)(v). In this context, she relied upon a decision of the Hon'be AP High court in case of P. Nageswara Rao Vs. CIT, 365 ITR 249 and the following decision:

1. Taher Aumohammed Poonawala Vs. Addll. CIT, 124 TTJ 387

Ld. DR also raised objections with regard to the additional ground raised by assessee and the additional evidence produced before the Tribunal by submitting that there being no valid reasons shown by assessee as to 6 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

why they were not taken before AO or ld. CIT they cannot be entertained at this stage.

8. In the rejoinder, ld. AR submitted before us, as there is no quantification of sale consideration under the development agreement except the percentage of constructed area to be received, it cannot be said that there was transfer of land for a consideration.

9. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other material on record. W e have also applied our mind carefully to the decisions relied upon by the parties. There is no dispute to the fact that assessee along with other co-owners has entered into a development agreement with a developer, Viz; M/s Shanta Sriram Constructions Pvt. Ltd. on 16/04/07. As per terms of the said development agreement, assessee along with co- owners is to receive built up area of 40% apart from refundable deposit of Rs. 5 crores. It is also not disputed that in pursuance to the development agreement assessee has handed over possession of land to the developer and the developer has started development activity. The main thrust of the argument of assessee is two fold. Firstly, assessee is not the owner of land as he has transferred it to his wife vide registered agreement of sale-cum-GPA executed on 04/04/06. Thus, it was submitted, when assessee is not at all owner of the property, capital gain cannot be assessed at his hand. Second argument of assessee is, the issue whether capital gain accrues on execution of development agreement is a debatable issue as there are divergent judicial opinion on the issue. Therefore, when the issue involved is a debatable issue, on which more than one view is possible, ld. CIT cannot exercise power u/s 263 by observing that the view taken by AO is not correct view. As far as the first argument of assessee is concerned, material on record indicate that assessee has entered into registered agreement of sale-cum-GPA with his wife Smt. Chhaya Devi Kankaria on 04/04/06 agreeing to sale his share in property for a consideration of Rs. 44,73,000. A copy of the said document, which is placed at page 73 7 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

of the paper book also indicates that the amount of Rs. 44,73,000 was paid to assessee vide cheque No. 963374 dated 04/04/06 drawn on Canara Bank, Masab Tank, Hyderabad. However, it is to be noted that in the development agreement of sale-cum-GPA dated 16/04/07 name of assessee appears as land owner, whereas, Smt. Chhaya Devi Kankaria has been shown as consenting party, but, strangely in the supplementary agreement executed on the very same day with the developer, which of course is not a registered document, the name of Smt. Chhaya Devi Kankaria does not appear at all. Further, in the very same supplementary agreement, a refundable advance of Rs. 7.20 crores was paid to the land owners by the developer. It is also interesting to note that in another supplementary agreement executed between parties on first day of October'07, the name of Smt. Chhaya Devi Kankaria does not appear as land owner. Therefore, if at all the land was agreed to be sold to Smt. Chhaya Devi Kankaria on 04/04/06, then, how come the name of Smt. Chhaya Devi Kankaria as land owner is not appearing in the supplementary agreement executed with the developer on first day of October'07 and 16/04/07 requires to be examined.

10. Furthermore, on perusal of the assessment order it is very much evident that AO has not discussed even a single sentence with regard to the issue of transfer of land to the developer. No other material has been brought to our notice to indicate that AO in course of the assessment proceeding has either conducted any enquiry with regard to the development agreement or examined the issue by applying his mind to the materials on record related to that issue. Though, ld. AR tried to impress upon us that all the documents relating to the development agreement were part of the seized material, but, that does not ipso-facto prove that AO has examined the issue relating to transfer of land under the development agreement and has formed an opinion. On the contrary, it reveals total non-application of mind by AO. Availability of material on record does not absolve the AO from making enquiry or applying his mind to the said material. Availability of materials on record by itself will 8 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

not prove that AO has applied his mind to those materials and formed an opinion unless discussion in the assessment order or entries in the order sheet or communication made by AO indicate so. Whether a particular issue is debatable or more than one view is possible on the issue can be known only when there is a debate and dialogue between the AO and assessee on the issue. Material on record must indicate that AO has applied his mind to facts and materials on record through a process of enquiry and investigation and formed a view on the issue. However, when the facts and materials on record are so glaring to indicate that AO has not at all enquired into the matter or applied his mind to the issue on which the order is sought to be revised, then, it cannot be said that ld. CIT cannot invoke the power u/s 263 of the Act as two views are possible on that issue. In the present case, though, assessee along with other coowners has entered into a development agreement and handed over possession of property to developer, admittedly assessee has neither offered any capital gain in the return of income filed for the impugned AY nor disclosed the reasons for not doing so. Even though, seized material available on record revealed the fact that assessee has entered into development agreement handing over his property to developer, the AO totally failed to apply his mind to these materials and examine the issue whether there was 'transfer' of capital asset in terms of section 2(47)(v) giving rise to capital gain in the impugned assessment year. More so, when the Hon'ble jurisdictional High Court in case of P. Nageswara Rao Vs. CIT (supra) has held that once possession is handed over to developer in pursuance to a development agreement there is 'transfer' in terms with section 2(47)(v). In these circumstances, the failure on the part of AO in making any enquiry and examining the issue of accrual of capital gain has rendered the assessment order erroneous and prejudicial to the interests of revenue. Therefore, invoking of power u/s 263 of the Act in the facts of the present case is justified.

11. As far as the decisions relied upon by ld.AR are concerned, on careful examination of the same we are of the view that they will not 9 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

apply to the facts of the present case. Ld. AR has relied upon the decision of Hon'ble Supreme Court in case of Suraj Lamp & Industries (P.) Ltd. Vs. State of Haryana (supra) for the proposition that transfer of immovable property can be validly made only through a registered deed of conveyance. However, on a careful reading of the aforesaid judgment of the Hon'ble Apex Court it becomes clear that the ratio laid down is applicable to contract of sale as envisaged u/s 54 and 55 and not section 53A of the T.P. Act. Moreover, in the aforesaid decision the Hon'ble Apex Court was not called upon to examine import of expression 'transfer' as envisaged u/s 2(47) and more particularly sub-clause (v) of section 2(47) of the I.T. Act, 1961, which takes within its ambit contracts of the nature referred to in section 53A of T.P. Act. Further, a reference to section 53A of T.P. Act makes it clear, the requirement is, there must be an agreement in writing from which transfer can be ascertained with reasonable certainty. Thus, the aforesaid decision will be of no help to assessee. In case of Binjusaria Properties Vs. ACIT, ITA No. 157/Hyd/2011 dated 04/0414 and in case of ACIT Vs. R. Srinivasa Rao, ITA No. 1786/Hyd/12 dated 28/08/14, ITAT held that there is no transfer u/s 2(47)(v) because there was material on record to show that developer was not willing to perform his part of the contract.

Whereas, in the present case, AO has not at all examined the issue. As far as other decisions of the Hon'ble High Courts relied upon by the ld. AR, there cannot be any dispute with regard to the principle decided therein to the effect that where two views are possible and AO has taken one of the view, jurisdiction u/s 263 will not arise. However, in the present case, AO has neither applied his mind nor examined the issue by making any enquiry, hence, formation of any view by AO does not arise. That being the case, these decisions will not be applicable. For the very same reason, the ratio laid down by the Hon'ble jurisdictional High Court in case of Spectra Shares and Scrips, 354 ITR 35 will also not apply. Though, it may be a fact that there are divergent views whether there is transfer giving rise to capital gain on the date of development agreement, but, fact remains, the issue requires examination by the AO and has to be decided on the basis of facts involved. AO has to decide 10 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

the issue of accrual of capital gain under a development agreement by examining various factors, like date of handing over of possession, willingness of developer to start development work, consideration received etc. However, in the present case, AO has not at all examined the issue, though, materials relating to entering into the development agreement are available on record. Therefore, there being failure on the part of AO to conduct enquiry and examine the issue or otherwise apply his mind to facts and materials on record, assessment order is erroneous and prejudicial to the interests of the revenue, thereby amenable to the jurisdiction u/s 263 of the Act. However, in our view, ld. CIT was not justified in straightaway directing AO to compute capital gain on transfer of land to the developer as per the development agreement. In our view, before coming to conclusion that there is a transfer in terms of section 2(47)(v) various factors as indicated hereinbefore, need to be examined. Assessee's claim that there was dispute between the parties and developer was not willing to carry out development work requires examination on the basis of evidence produced by assessee. Further, AO is required to examine assessee's claim that he is no more owner of the property as it was sold to his wife by registered agreement of sale on 04/04/06. AO also is required to determine the year of taxability considering the claim of assessee that capital gain on transfer of land to the builder was offered by the land owners in A.Y. 2011-12 upon cancellation of development agreement and execution of sale deed. In the aforesaid facts and circumstances, though, we uphold the exercise of jurisdiction u/s 263 by ld. CIT, but, we modify his order by directing AO to examine the issue of accrual of capital gain in the impugned AY, independently, without being influenced by any of the observations of ld. CIT. AO must decide the issue considering all facts and materials on record as well as the submissions of assessee and keeping in view the judicial precedents which may be relied upon by assessee as well as department. Needless to say, AO shall afford reasonable opportunity of being heard to assessee before deciding the issue.

11 ITA Nos. 673, 674 & 675/Hyd/2012 Sri Kushal Kumar Kankaria & others

12. In the result, appeal of the assessee is partly allowed for statistical purposes.

13. As the grounds, facts and circumstances except the issue of ownership, are materially identical in ITA Nos. 674 & 675/Hyd/2012 to that of ITA No. 673/Hyd/2012 (supra), we direct AO to decide the issue of accrual of capital gain as per our directions therein.

14. To sum up, all the three appeals under consideration are partly allowed for statistical purposes.

Pronounced in the open court on 10 t h April, 2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 10 t h April, 2015 kv

Copy to:-

1) Kushal Kumar Kankaria, 2) Dinesh Kumar Kankaria, and 3) Sanjay Kumar Kankaria, C/oVenugopal & Chenoy, CAs, 4-1-889/16/2, Tilak Road, Hyderabad - 500 001.

4) ITO, Ward - 6(3), IT Towers, Masab Tank, Hyderabad

5) CIT-III, Hyderabad

6) Addl. CIT, Range - 6,Hyderabad

7) The Departmental Representative, I.T.A.T., Hyderabad.