M/S Leo Township Developers India ... vs Department Of Income Tax

Page 1 of 9 13.02.2013 for the Assessment Year (AY) 2006-07, raising the following Grounds of Appeal:

i. The order of the Commissioner of Income Tax (Appeals) is erroneous both in law and in facts of the case.

ii. The Commissioner of Income Tax (Appeals) ought to have appreciated the fact that as the assessee is following mercantile system of accounting the whole amount of sale should be considered as accrued to the assessee.

iii. The Commissioner of Income Tax (Appeals) ought to have appreciated the fact that through the agreement of sale dated 02.11.2005 the assessee is entitled to receive the amount of Rs.502,60,000/- and it is accrued to the assessee as the assessee has the right to receive the same.

iv. The Commissioner of Income Tax (Appeals) ought to have appreciated the fact that ITAT, Bench 'B' in ITA No.1080/Hyd/2011 dated 18.05.2012 has already decided the matter on an appeal by the assessee on the order u/s. 263 passed the Commissioner of Income Tax.

v. Any other ground that may be urged at the time of hearing.

2. The brief facts of the case are that the Respondent-Assessee Company is a company incorporated under the provisions of the Companies Act, 1956, and is engaged in the business of Real Estate. The return of income for the assessment year 2006-07 was filed on 17.03.2007 declaring a total loss of Rs.14,030/-. Against the said return of income, the assessment was completed u/s. 143(3) vide order dated 24.12.2008 accepting the returned loss. Subsequently, the Commissioner of Income Tax-IV, Hyderabad, exercising the power of revision vested with him under the provisions of Section 263 of the Page 2 of 9 Income Tax Act, 1961, had set aside the assessment to re-examine afresh whether the transaction of the Agreement of Sale, the Respondent Company had with M/s. Leo Edibles and Fats Limited, it amounted to sale or not. The crucial facts of the transactions are that the Respondent-Assessee Company had acquired/purchased the following lands at Mansanpally Village, Maheswaram Mandal, Ranga Reddy District:

Sl.No. Details of land purchased Extent Value in Rs.

01 Sale Deed dated 03.11.05 vide 15AC- 3,45,55,650 document No.6938/2005 33Gts/Sy.No.332 02 Sale Deed dated 03.11.2005 06AC- 76,37,525 videdocumentNo.6939/2005 39Gts/Sy.No.328 03 Sale Deed dated 18.11.05 vide 01 AC- 16,15,025 document No.0981/2005/ 19Gts/Sy.No.337 04 Sale Deed dt. 18.11.2005, vide 01 AC-37 Gts 25,29,350 document No.7050/2005 Sy.No.332, 333, 331 05 Sale Deed dated 18.12.05, Vide 01 AC- 4,84,440 document No.7835/2005 19Gts/Sy.No.337 Total 4,68,21,990

3. The Respondent-Assessee Company had entered into an Agreement of Sale dated 02.11.2005 with M/s. Leo Edibles and Fats Limited to sell the land to the extent of Ac.22.32 Gts. out of the above lands for a consideration of Rs.5,01,60,000/- at the rate of Rs.22,00,000/- per acre. In terms of the same Agreement of Sale, the Respondent-Assessee Company had received a sum of Rs.36,55,000/-

as advance on 02.11.2005 from the said company. According to the learned Commissioner of Income Tax, this transaction should be treated as a contract of sale and the agreed consideration of Rs.5,01,60,000/- should be treated as sale in the hands of the Respondent-Assessee company. The learned Commissioner of Income

Page 3 of 9 Tax also noted that the Respondent-Assessee is in the business of real estate and the land proposed to be sold was treated as stock-in-trade. The learned Commissioner of Income Tax further observed that since the Respondent-Assessee company was following the mercantile system of accounting, the transaction should have been accounted as credit sale. Accordingly, the assessment was set aside by the learned Commissioner of Income Tax with the following directions:-

"4. I, therefore, direct the Assessing Officer to re-examine the transactions in-depth. She/He should call for the original Minutes Book as maintained by the assessee company and the Vendee in he regular course of their Board Meetings and examine the same. She/He should summon and examine accountable person from M/s. Leo Edibles & Fats Limited. The Assessing Officer should also examine as to whether the assessee had made any application to the competent authority for re- classification of the land at 'industrial land'. She/He should call for and examine the original documents and records. She/He should examine assessability of Rs.5.01 Crore. In case of positive cumulative findings, she should consider bringing the said amount to tax.

"5. In view of the aforesaid, I hold that the assessment completed by the Income Tax Officer, Ward-6(1), Hyderabad is erroneous in so far as it is prejudicial to the interest of the revenue. I, therefore, deem it proper to set-aside the said assessment order with the direction to re-do the same in the light of the aforementioned findings, observations and directions."

4. Aggrieved by this order, an appeal was filed before this Hon'ble Tribunal. This Hon'ble Tribunal, after hearing both the sides, had confirmed the action of the learned Commissioner of Income Tax in revising the assessment order vide its order dated 18.05.2012 in ITA No.1080/Hyd/2011. We have no information whether the Respondent-Assessee is on further appeal before the Hon'ble High Court on this order or not. Thus, the order of the revision passed by Page 4 of 9 the Hon'ble Commissioner of Income Tax had attained the finality. Consequent to the order passed u/s. 263 of the Act, the Assessing Officer had passed consequential order after affording an opportunity of being heard to the Respondent-Assessee company vide order dated 27.12.2011 treating the transaction as a sale and brought to tax the excess of sale consideration over the purchased price of Rs.79,27,913/-. Aggrieved by this order, an appeal was filed before the learned Commissioner of Income Tax (Appeals)-V, Hyderabad, who, vide order dated 13.02.2013, allowed the appeal, vide para 5.3 of his order, which is extracted below:-

"5.3 I have gone through the order under section 263, assessment order and the entire submissions of the appellant. In the order under section 263 of the Act, the Commissioner of Income-tax had directed the Assessing Officer to make in-depth and specific enquiries on he transaction with the transacting parties, and analyze the material submitted by the appellant and, in case, of positive and cumulative findings, the transaction shall be treated as sale and the amount be brought to tax. However, from the assessment order, I find that the Assessing Officer had not recorded any such cumulative findings for holding the transaction entered by the appellant for the year consideration as 'sale'. As a prudent business man, the appellant entered into an agreement for sale of land. As was done in individual cases, the transaction cannot be treated as 'transfer' basing on the agreement for development. The Assessing Officer almost equated the business transaction of agreement of sale of the appellant-company with a 'development agreement' entered into by an individual for development of his land to a developer.

In such development agreements with possession of the land, it was held by various courts that the transaction is transfer within the meaning of section 2(47) and exigency of capital gains arise from such transactions. However, in the case on hand, the facts are totally different. The appellant entered into an agreement of sale for selling their land and received part of consideration. Such agreements cannot, at any stretch by imagination, be treated as sales and taxed under any system of accounting. Only when the property in question was sold by way of executing a sale deed Page 5 of 9 with possession and registered in the name of the purchaser, the transaction can be said to be sale and income had to be taxed on the profits so arrived at from the sale. In the case on hand, no such final transaction has taken place, and therefore, the agreement of sale cannot be termed as sale and the consideration agreed therein cannot be taxed as business income, merely on the ground that some consideration has been parted with by the transacting parties. In the assessment order, the Assessing Officer also overlooked the condition that the seller should apply for conversion of the land in question as 'industrial land' and then the final sale should take place.

In this regard, no independent effort appears to have been made by the Assessing Officer to bring on record about the application made by the appellant for reclassification of the land as 'industrial land'. The Assessing Officer also brought out some isolated portion of clause (3) of the agreement regarding the possession and stated that the possession of the land is given by the seller. However, that is not the case as per the agreement of sale. In view of he above discussion, I am not inclined to sustain the addition so made and direct the Assessing Officer to delete the addition."

5. Aggrieved by this Order, the Revenue had come up with the present appeal before us. There are five grounds of appeal out of which, grounds Nos.1 and 5 are general in nature and thus, does not require any adjudication. Ground No.4 is dismissed as infructuous. Therefore, the effective grounds of appeal are only 2 and 3, which relate to deletion of addition of Rs.79,27,913/- arising out of treating the agreement for sale of land as sales. The learned Senior Departmental Representative vehemently argued that the Commissioner of Income (Appeals) ought not to have deleted the addition, inasmuch as, the Respondent-Assessee Company was following the mercantile system of accounting and the possession of the property was given as per terms of the agreement, substantial amount of consideration was received. The Agreement of Sale which was stated to have been cancelled was never produced before the Page 6 of 9 Assessing Officer. Further, he had drawn our attention to clause (3) of the Agreement of Sale, which reads as under:-

"3. The Vendee has paid the following advances, as part consideration, and the Vendor hereby acknowledges the receipt of same.

Date Cheque No. Amount Name of the Bank 02.11.2005 Advice letter Rs.36,55,000/- UTI Bank Limited, Begumpet Branch Hyderabad

The Vendor shall hands over the vacant physical possession of the Scheduled Land to the Vendee on the date of final payment and execution of the sale deed whichever is later. The Vendee shall be at liberty to occupy the land and use it without any hindrance or objection from the Vendor from thereon."

Therefore, he submitted that the impugned transaction should be treated as sale and the Commissioner of Income Tax (Appeals) without properly appreciating the facts of the case, had deleted he addition, and he had placed strong reliance on the order of the Commissioner of Income passed under Sec. 263 of the Act, as well as on the order of assessment. On the other hand, the learned Counsel for the Respondent-Assessee Company had drawn our attention to the Paper Book filed by the Respondent-Assessee company, exhibiting the Encumbrance Certificate of the lands, and copies of Minutes of Board of Directors dated 26.03.2008, and copies of Ledger Accounts with M/s. Leo Edibles & Fats Limited etc. He submitted that the lands proposed to be sold were shown as stock-in-trade in the books of the Respondent-Assessee company and, therefore, the definition of "transfer" under the provisions of sub-section (47) of Sec.2 of the Act has no application to the facts of the case. He further submitted that the agreement was cancelled subsequently on 27.03.2008. A copy of Page 7 of 9 the cancellation of Agreement of Sale is placed at page No.5 of Paper Book. Finally, he submitted that since the property involved is immovable property unless and until the transaction of sale is evidenced by a Conveyance Deed duly executed and registered, it cannot be said that the lands were sold. Therefore, he prayed that the order of Commissioner of Income Tax (Appeals) may be upheld.

6. We heard the rival submissions and perused the material on record. In this case, in the given facts of the case, we are required to adjudicate whether there is a sale of the lands having regard to the terms of agreement of sale and as well as the method of accounting followed by the Respondent-Assessee Company. The genuineness of the agreement of sale is not doubted by the Assessing Officer. Admittedly, the Respondent-Assessee Company is in the business of real estate. Therefore, the lands which were proposed to be sold were shown / treated as stock-in-trade in the books of the Respondent- Assessee company. Therefore, the definition of term "transfer" as given in the provisions of sub-section (47) of Section 2 of the Act, has no application, because the definition is given in relation to capital asset, which is not clearly applicable to stock-in-trade. Therefore, the law applicable to the immovable property is to be considered to determine whether there is a sale or not. The Hon'ble Apex Court in the cases of CIT vs. Bhurangya Coal Co. 34 ITR 802 and Alapati Venkatramiah 57 ITR 185 laid down that the transfer of immovable property was considered to have taken place upon conveyancing and not the date of agreement of sale.

Page 8 of 9 7. In the case on hand, undisputedly it was only an agreement of sale, which was entered into between the Respondent-Assessee Company and M/s. Leo Edibles & Fats Limited. No Sale Deed was either executed or registered. Therefore, applying the law laid down by the Hon'ble Supreme Court in the above cases supra, it cannot be said that there is a sale of lands pursuant to the Agreement of Sale. Therefore, we concur with the order of the learned Commissioner of Income Tax (Appeals) and we do not want to interfere with the order of Commissioner of Income Tax (Appeals). Hence, the grounds of appeal filed by the Revenue are dismissed.

8. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the Open Court on 15th July, 2015.

Sd/- Sd/-

(SAKTIJIT DEY) (INTURI RAMA RAO) Judicial Member Accountant Member

Hyderabad, dated 15th July, 2015. ............./sps Copy to:

1. Income Tax Officer Ward 16(1), Room No. 613, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad - 500 004.

2. M/s Leo Township Developers India Pvt. Ltd, Flat No.304, Minar Apartments, Deccan Towers, Basheerbagh, Hyderabad

3. CIT(A)-V, Hyderabad

4. CIT -IV, Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

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