Tribunal provide method of Calculating Capital gains and Business profit in case of sale of flats under development agreement

S. Rama Rao for the Appellant. Rajat Mitra for the Respondent.

ORDER

Per Bench – These forty appeals filed in the case of fourteen assessees for two years i.e. 2008-09 and 2009-10 involve common issues and the same, therefore, have been heard together and are being disposed of by a single composite order for the sake of convenience.

2. The main common issue involved in these appeals relates to the determination of the head of income under which profits arising to the assessee companies from the transfer of their lands as per the development agreements and from the sale of flats/bungalows allotted by the developer in lieu of or as consideration for transfer of land is chargeable to tax. The remaining common issues involved in these appeals are incidental to the main issue and they mainly relate to the determination of the quantum of income that is chargeable to tax in the hands of the assessee once the head of income is determined/decided. Since the issues involved in the case of all the fourteen assessee’s as well as the facts relevant thereto are materially similar, we take the case of M/s. Goman Agro Farms Pvt. Ltd. for the purpose of narrating the facts in detail and considering and deciding the issues involved in the light thereof.

3. The assessee M/s. Goman Agro Farms Pvt. Ltd. is a company. It acquired lands in two pieces to the extent of seven acres in the financial year 2002-03 at Survey No.194 Bachupalli Village, Ranga Reddy District. Thereafter, it incurred some expenditure on fencing, laying of roads, etc. in respect of the said land during the financial years 2002-03 to 2005-06. On 30.12.2005, the assessee company and thirteen other companies who had also owned lands adjacent to the land of the assessee company, entered into development agreement with M/s. Maytas Properties P. Ltd. As per the said development agreement, the developer agreed to construct apartments and bungalows on the land owned by all the fourteen companies and to give/allot 27% of the area of such apartments and bungalows to the land owner companies. Accordingly, the land of around 98 acres was pooled up by the developer from all the fourteen companies and flats and bungalows were constructed. The assessee company in lieu of transfer of its land thus was given certain built up area in the form of flats/bungalows which were subsequently sold to various buyers. For the flats and bungalows so sold during the year under consideration i.e. 2008-09, the assessee company received total sale proceeds of Rs. 7,90,82,027. For the purpose of taxation, these sale proceeds/receipts were bifurcated by the assessee company into proceeds received by it in the form of built up area (which it received on the sale of land) taking the cost of construction as the basis; and further proceeds received by it on the sale of such constructed area to various buyers. The first transaction was considered by the assessee company as transfer of first capital asset i.e. land, while the subsequent transaction was considered as transfer of second capital asset, i.e. built up area. Since the land was undisputedly held by the assessee company for a period of more than 36 months, it was treated as long term capital asset and profit arising from such asset was offered to tax as long term capital gain. As the built up area was held by the assessee for a period of less than 36 months, the same was treated as short term capital asset and profit arising from the transfer or sale thereof was offered to tax as short term capital gain. Accordingly, a sum of Rs.4,86,86,431 worked out by deducting the indexed cost of acquisition from the sale proceeds was offered as long term capital gain and a sum of Rs.2,78,78,141 was offered as short term capital gain. For calculating the short term capital gain, the cost of acquisition of built up area was taken as ‘nil’ by the assessee company, as the same was received in lieu of the sale of land owned by it.

4. The issue relating to the assessee’s claim of long term capital gains and the short capital gains arising from the transfer of land and sale of built up area respectively was examined by the Assessing Officer during the course of assessment proceedings in the light of the relevant factual background. On such examination, he recorded his findings/observations in detail as under:—

“5.1 The family members of Sri B Ramalinga Raju entered into real estate business. In a very planned, systematic manner by floating the companies and acquisition of lands in the vicinity indicates that. As part of it, various companies under their own family members management were floated, lands were acquired In the vicinity. The dates of acquisition of lands in the same survey numbers around the same time period clearly indicates that, fourteen companies acquired land in such a way that, if pooled they will form a single piece of continuous land that can be used on a future date without any hindrances. The topography of the site with survey numbers is enclosed with this assessment order as annexure. The above also Indicates that at the time of purchase of lands itself, the clear intention of companies and the individuals involved in it was to develop them on future date and sell them after making profit.

5.2 All the land owning companies pooled up their land facilitating a joint mega venture by a common agreement with developer i.e., M/s. Maytas Properties Pvt Ltd. and planned their activities in such a manner that they will take maximum advantage of their possession.

5.3 As holding company M/s Maytas, Properties Ltd. completely acquired the control on the all the land owning companies by making them as its subsidiary companies and controlled their affairs in total. All this is a systematic planning and execution with a ultimate motive of earning profits on a later date. The companies were floated with an idea of land acquisition on various names and once an agreement was reached, mega project was launched all these companies went in to the control of the developer facilitating raising of the loans from the bank and other operational conveniences. Though all these transactions were carried on different entities names, ultimately all it is nothing .but planned and systematically executed activity by few closely related individuals with clear motive of earning the profit.

5.4 The assessee-company systematically followed the method of• accepted revenue recognition i.e., Project Completion Method and its activities can be identified with a systematic business activity by any other company.

5.6 The company M/s Maytas Properties Pvt Ltd. itself admitted that physical possession of the land was taken over in the year 2005-06 from various land owning companies. On verification of the present assessee- company records for the relevant period, it is clear that it has not offered any income under the Head “Income from Capital Gains” From this; it is evident that the assessee-company itself was not clear on method of treatment of the revenues received. If it were of the view that the proceeds are nothing but ‘gain’ obtained in the disposal of a capital asset, the same should have been offered for taxation in the first year 2005-06 itself as per the Transfer of Property Act, as the physical possession was given indicating that transfer was complete. By offering the same in the fin. Year 2007-08, indicates that the proceeds were gained from business.

5.7 Further, on verification of the agreement with M/s Maytas Properties Pvt Ltd. and subsequent developments, it is evident that the assessee company never carried out its activities in isolation. It carried out all its activities jointly with remaining land owning companies. On further verification of the sale deeds executed for various flats/bungalows buyers’, it is evident that for the registration of undivided share of land also, the pooled-up land was treated as “single piece of land”. Even the sale proceeds received from various flat/bungalow buyers’ were passed on to the land owning companies in the ratio of their land holding in the pooled up lands.

5.8 For all practical purposes such as sale of land, sharing of the sale proceeds etc., the activity was carried out as a single business venture only. The assessee-company and 13 other land owning ‘companies with the help of the agreement with the developer carried out systematic, and planned activity of development of the area, construction of the apartments and bung-lows, sale of the built-up area to various buyers, advertisement of the venture etc.

5.9 Though the lands were claimed to be agricultural lands, no agricultural activity was carried in these lands during any of the years. In fact, the land was subjected to various developmental activities such as, fencing, road laying etc., over a period of time.

5.10 On close observation of the financial statements of the assessee-company and 13 other companies which were land owners, it is clear that, in these cases, investment was not through the surplus of the funds, but was out of borrowals, unsecured loans and advances received. The assessee company never carried out any income earning activity prior to the present transaction and money mobilisation was as share capital, borrowals and unsecured loans.”

5. In the light of the above findings observations recorded by him, the Assessing Officer proceeded to consider the issue relating to the head of income under which the relevant profit earned by the assessee company was chargeable to tax. In this regard, he relied on the decision of the Hon’ble Supreme Court in the case of Sri G. Venkataswamy Naidu & Co. v. CIT[1959] 35 ITR 594, wherein certain tests were laid down for determining whether a particular transaction is a transaction in the nature of investment or of an adventure in the nature of trade. Applying the said tests to the relevant facts as involved in the case of the assessee company, the Assessing Officer recorded his findings as under:—

a. The purchase and sale of the lands are not allied to is usual business of trade. In fact, there was no other business/trade for the assessee company to relate the present activity of sale of land.

b. The commodity in consideration was land. In the: present case, drawing the comparison is not possible as the assessee-company is not involved in any other regular business activities.

c. The assessee-company from the financial year 2002-03 to 2007-08 incurred certain expenditures such as, fencing the land road laying other developmental activities. Subsequent to the agreement with the builder i.e. M/s. Maytas properties limited, the later as per the understanding with the former, carried further developmental activities such as laying the roads, leveling the land, development of green belts, laying the sewerage lines, laying the al lines, developing the common amenities etc. In fact, the builder as developer constructed flats and bunglows, subsequent to the agreement with the assessee-company. Then the final product i.e. built up area was systematically marketed with proper advertisement and with the support of deployed employees buyers were identified and built-up areas w ere sold at regular Intervals. Because of all these activities only, the commodity In the possession of the assessee-company i.e. land became readily salable. Thus due to the initial development activities by the assessee-company and subsequent developmental activities by the developer, the land became easily salable at more profitability.

d. As mentioned above, the land purchased was not sold as it was subsequently. There were certain Incidents i.e. various developmental activities and constructions thereon, were closely associated with the sale of land.

e. The developmental activities, construction and systematic marketing are the usual activities associated with a regular business of construction of dwelling units. In the regular business of construction, the businessman will acquire the land, make it suitable for the developmental activities proposed,’ construct dwelling units as per the requirements, market them, and sell to various buyers though its deployed staff. The activities of the assessee-company In the present case can also be closely compared with the regular activities in the business of construction of dwelling units.

f. The purchase of the lands and sale of the dwelling units are repeated activities carried by the assessee company. It is clear from the following:

Details of lands acquired during the F.Y. 2002-03:

Details of lands sold during the F.Y. 2007-08

g. On verification of the balance sheets of the assessee-company, it is clear that the surplus of the funds were not utilized for purchase of the lands. In fact funds were mobilized from time to time through share capital, borrowals, unsecured loans and other advances and same were utilised for purchase of the lands. No income was earned by the assessee company prior to the present transaction.

h. The most important point that is to be considered in the present case is acquisition of the land simultaneously by the assessee company and 13 other companies in the close vicinity in such away that the land can be pooled up and can form single piece of land in a continuous manner and can be developed without any hindrances. This clearly test that lands were purchased with a clear intention of earning profit through subsequent sale but not for the purpose of investment. In fact, a family group has decided to venture in to the real estate business, floated companies for a limited purpose of land acquisition and subsequently pooled them to develop a mega venture with a clear vie mailing profit out of it. For all practical purposes like land purchase, agreement for development, raising the bank loan, marketing, registering the property to the buyers it was systematically planned and carried out as a single business venture. To facilitate this there were close transactions between the above family group, shareholders and directors of the assessee company, remaining 13 other companies and the developer M/s. Maytas Properties Ltd.

i. The following are the details of the neighbouring lands which are owned by the sister concerns of the assessee-company are as under:-

Details of the neighbours land

6. On the basis of the above findings, the Assessing Officer was of the view that the relevant transaction of the assessee company was not a simple case of disposing of a capital asset, but could definitely be viewed as plunge into the business activity which was nothing but an adventure in the nature of trade. According to him, the profit arising from such transaction therefore, was nothing but an adventure in the nature of trade. According to him, the profit arising from such transaction therefore, was required to be brought to tax under the head ‘income from business or profession’ and not capital gain. He therefore, afforded one more opportunity to the assessee to show cause as to why the income returned by it under the head capital gains should not be brought to tax under the head ‘profits and gains of business or profession’. Availing the said opportunity, the following explanation was offered by the assessee vide its letter dated 20.10.2010.

“……

We object to the proposition of the assessing officer tax the income that was rightly admitted under the head “capital gains” as “income from Business/Profession”. It is on records that the assessee company was an agricultural company. One of the components that enter into taxation is the, taxable event that attracts the levy. In the fact of our case the undisputed fact being that the assessee is an. agricultural company, the taxable event is the sale of end from which surplus has arisen. The land was held as fixed asset in the balance sheet. It was never held as a current asset or stock in trade. The surplus was therefore the consequence: of appreciation in the value of fixed assets.

The prospective of the matter at issue being so the assessee company has rightly considered the surplus on the sale of fixed as its i.e., land as income under the head “capital gains” taxable under the provisions of section 45 of the income tax Act 1961. Further the objects of the company as noticeable from the memorandum of Association, and so categorical, that the assessee company is an agricultural company.

When the investment made by the assessee company in land was that of capital asset it is not open for the assessing officer, to change the character of asset, to re-compute the surplus by invoking the provisions of section 28 of the income tax Act 1961.

It is equally not justifiable on the part of the assessing officer to suggest the nature of asset, and the conduct of business, thereby treating sale of lands as trading activity when the basic object of the assessee company being investment in land. Any surplus arising out of sale of such land was in. the nature of realization of the appreciation of the investment and in no event by a wishful thought of proposition, the head of income can not be changed as revealing from the present letter, that is not warrant in the facts of our case.

In view of that has been explained above we object to re-compute the taxable income by changing the need of income from capital gains to that income from Business/Profession.. Accordingly, it is prayed that the income as admitted under the head capital gains may kindly be accepted for purpose of assessment.”

7. The above explanation offered by the assessee was not found acceptable by the Assessing Officer. According to him, the same was general in nature not specific on any point raised by him in the show cause notice. He held that a mere treatment given by the assessee company to the land as fixed asset in the Balance Sheet stating that it was an agricultural company was not conclusive in this regard and all the facts of the case since the inception of the case till the disposal of the asset were required to be considered to decide the issue. Accordingly, based on the various findings/observations recorded by him, the Assessing Officer held that the transactions carried out by the assessee company was nothing but an adventure in the nature of the trade and the profit arising out of such transactions was required to be brought to tax in its hands under the head ‘profits and gains of business or profession’ and not capital gains. Accordingly, after deducting the cost of land of Rs.16,62,085 and allowable expenditure of Rs.33,036 from the gross sale proceeds of Rs.7,90,82,029, income of the assessee from the relevant transactions chargeable to tax under the head ‘profits and gains of business or profession’ was worked out by the Assessing Officer at Rs.7,73,86,908 in the assessment completed under S.143(3) vide order dated 2.12.2010 for the assessment year 2008-09.

8. Against the order passed by the Assessing Officer under S. 143(3) for assessment year 2008-09, an appeal was preferred by the assessee before the learned CIT(A), disputing the action of the Assessing Officer in treating the profit arising from the transfer of land as per the development agreement and further sale of flats and bungalows received from the developer as consideration for the land as its business income instead of capital gains. During the course appellate proceedings before the CIT(A), it was pointed out that the assessee company was incorporated as an agricultural company and had purchased the land in question for cultivation. It was brought to his notice that the main objects of the assessee company only speak of agriculture, horticulture, sericulture, seed farm, nurseries, green houses, plantation, grape garden, etc. It was also highlighted that the land in question was shown as fixed asset in the books of account of the assessee company and the assessee never treated the same either as a current asset or as stock in trade. It was also pointed out that wealth tax was paid by the assessee company on the land held by it and the same having been accepted by the department, the nature of land being a capital asset was deemed to have been accepted. It was contended that the land thus represented capital asset of the assessee company and it was not open to the Assessing Officer to change the character thereof for treating the surplus as business income by invoking the provisions of S.28 of the Act.

9. As regards the case laws relied upon by the Assessing Officer, it was contended on behalf of the assessee that the same were distinguishable on facts and the reliance of the Assessing Officer thereon to draw adverse inference against the assessee was clearly misplaced. Reliance was placed by the assessee on various judicial pronouncements to contend that land given by it for development could not be regarded as trading activity and the surplus received in the process was liable to be treated as capital profit and not as a business surplus or a trading profit. It was also submitted that the sale of land as in the case of the assessee could not be compared to any other sale of commercial commodity and the decision of the Hon’ble Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 was cited to contend that transaction of purchase of land could not be assumed, without there being anything more, to be a venture in the nature of trade. Reliance was also placed by the assessee on the decision of the Hon’ble Madras High Court in the case of CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 in support of its contention that the best price realised on any investment made in capital asset, after developing the land would be construed as capital appreciation, which is chargeable to tax as capital gain and not as profit from an adventure in the nature of trade. It was contended on behalf of the assessee company that the entire income earned by it from the transfer of land as per the development agreement and further sale of flats and bungalows received as consideration for land was assessable in its hands under the head ‘capital gains’ and not as ‘business income.’

10. Without prejudice to its main contention and as an alternative, it was also submitted by the assessee company that the second leg of transaction i.e. sale of flats and bungalows could be considered as business income, consequent to the conversion of these assets into stock in trade in terms of S.45(2) of the Act. It was contended that the transaction on account of the original transfer of agricultural land for development and the subsequent sale of land alongwith the apartments/villas could be distinguished. It was claimed that the provisions of S. 45(2) could be invoked to treat the first transaction as conversion of fixed assets into stock in trade and be subjected to capital gains, while the second transaction, which is subsequent to the conversion of capital asset into stock in trade could be taxed under the head ‘income from profits and gains of business or profession’. Reliance was placed by the assessee on the decision of the Tribunal Hyderabad Bench in the case of Spectra Shares & Scrips (P.) Ltd. v. Asstt. CIT (IT Appeal lNo.293/Hyd/2012 dated 27-7-012) in support of this alternative contention.

11. After considering the submissions made by the assessee and perusing the relevant material on record, the learned CIT(A) did not find merit in the main contentions raised by the assessee that the entire profit arising from the transfer of land as per the development agreement and subsequent sale of flats and bungalows received as consideration of land is chargeable to tax under the head capital gains, for the following reasons given in his impugned order-

“7.0 FINDINGS

(a) A number of case laws have been cited by the appellant but the facts of the appellant’s case are different and most of the cited case laws on development agreement are not applicable for the-simple reason that taxability or otherwise of the receipts on account of the development agreement is never the issue in this case. The only issue in this case is whether these receipts should be taxed under the head business income or under the head capital gains as returned by the appellant.

(b) Whether the proceeds of a transaction are in the nature of capital gains or business receipts depend upon the facts of each case and there is no straight jacket formula. It is the intention behind entering into and conducting of a transaction which is the key determinant. Even a single transaction can take the character of business. The facts of the appellant’s case are therefore examined in this light.

(c) At the outset the most interesting aspect is the very method of computation of its income. The appellant linked its income and receipts to the income and profitability of the developer and the “income” of the appellant is “finalized” only after the developer Co. finalizes its accounts and allots 27% of the income to the land owning Cost is amount of 27% is in turn distributed among the land owning companies in the ratio in which they contributed land to the total project. It is interesting to note that even in the written submissions filed, the appellant had clearly stated that it was entitled to receive 27% of profit of the developer company as the share/due to the 14 land owning companies that had entered into the development agreement. Please see 1st item of submissions in the table at Para 5.

(d) The above practice of computing income is strange when the appellant claims that its income is taxable under the lead capital gains. The appellant speaks of a development agreement and two stages of income which it classified as long term and short term. capital gains and had even offered, as an alternate plea, to consider the receipt from second leg of transaction as business income consequent to conversion of capital asset as business asset. Yet, it does not consider the provisions of section 2(47)(v) and nor does it keep in view of the decisions of Hon’ble Bombay High Court in the case of Chaturbhuj Dwarakadas {2003 (2) Bom CR 449, (2003). 180 CTR Bom l07} and the order of the jurisdictional ITAT, Hyderabad in the case of Dr. Maya Shenoy v ACIT in IT A 222/Hyd/2005.

(e) Secondly, though the development agreement speaks of appellant receiving in 27% of built up area of flats and plots(villas), the appellant never indicated the number of plots (villas) or the total built up area received in sq.ft. in lieu of consideration as per the development agreement – a practice adopted in all other cases of development agreement. In all such cases, normally, the cost of construction of the total built up area given to the land owners would have been considered as consideration received and would have been taxed as capital gains straight away in the ear of signing of development agreement.

(f) The method of computation of income by the appellant in given below:-

(g) In the above table, the appellant having arrived a 7.9 crores as receipts/income did another interesting adjustment of spliting it between the long term and short capital gains. For this, the appellant “estimated” as to what would be the proportion ‘of total cost of construction (debited in the developer books) that would match the net sales income/revenue/receipts of the Co. For the 14 land owning Cos, the net .revenue (after costs) came to Rs.97 crores (as against 101 crores in the table supra). To match this revenue, the construction cost was estimate at Rs.62.95 crores. Both the Revenue (97.07 crores) an construction cost (Rs.62.95 crores) were then apportioned to the 14 land owning Cos. The appellant’s share came to 7.90 crores of revenue and 5.12 crores of cost of construction. This 5.12 crores was taken as long term capital gains and from this the cost of land (after indexation) was reduced to arrive at long term capital gains of Rs.4.86 crores. From the net receipts of Rs.7.65 crores tabled supra, this amount of Rs 4.86 crores was reduced and the balance Rs.2.78 crores was taken as short term capital gains.

(h) Thus, it may be seen that the receipts offered to tax are NOT the “proceeds” on account of transfer of land through the development agreement and the subsequent sale proceeds of flats/villas that were sold during the year, and which come to appellant’s share. instead, a percentage of developer’s income from this project (computed independently) was considered as appellant’s income. Even though a split between long term and short term capital gains is show not computed in terms of consideration received for land in terms of built up area of villas/fiats BUT as an “estimate” of cost of construct on that would match the receipts considered as income. It has no connection to the actual area that the land owning Cos receive as a group (forget whit the appellant receives). To illustrate, if the receipts to be offered as income are considered as Rs 100/- (this itself is arrived at by considering total receipts and then taking a proportionate percentage bared on percentage completion of work !) then an “estimate” of what would be proportional “construction cost “is estimated. Thus, irrespective of the form in which the appellant finally returns income (as long term and short term capital gains,) essentially it had hitched its working to the working of income of developer and then took a percentage of it.

(i) The moment the income or gains are linked to year wise profits of the developer from the project and are not computed on stand-alone basis, the activity would partake the character of an adventure in the nature of trade as certainty of gains is replaced by fluctuation and uncertainty regarding the profits/income as it is now dependent on the developer’s income. The reasons as to why the appellant effected the development agreement in this manner are not difficult to understand as explained in the next few paragraphs.

(j) The project is a very large one with about 840 flats and about 326 villas and as it was being developed as prestigious project, there was lot of demand and the initial reports speak of people/buyers queuing up to book a flat/villa in this venture. Further, as it is evident in almost all such cases, the initial offer for sale would also be at a lower rate and a the project nears completion, the rates shoot up. Thus, there would be escalation in the price over a period of three four years which the project would take to complete and the profits also would go up as the project nears completion. Normally, only the sale proceeds from the flats/villas that belong to the appellant’s share, and which were sold during the year, would have been reflected as receipts. The profits as result of incremental value additions and other charges and levies made by the developer would not be part of these receipts. The appellant clearly was looking for a part of these profits that accrue to the developer as well.

(k) Secondly, by linking the profit to the developer’s profit, which in turn can computed as percentage completion method, the appellant ensures that the incomes offered to tax are spread over a period and the tax payments are thus rolled over a span of 3 or 4 years (as long as the project takes to complete) instead of paying the bulk of tax liability at one go in the initial year when the land was transferred to the developer.

(l) Thirdly, the profits offered to tax also would factor he costs and the land owner companies like appellant, end up lowering their profits by underwriting the developer’s costs and cost escalated on through the mechanism of percentage completion method of computing the developer’s profits. The appellant has no business or contractual obligation to do so.

(m) The above becomes amply clear when we examine the appellant’s own return for AY 2009-10 and its assessment, wherein there is substantial discussion about the downward revision of income of the developer company and the consequent revision in the 2 % of profit being .shared with the land owning companies, including the appellant company. The Co. actually ended up in “loss” even when there were receipts on account of sales of plots and flats

(n) Thus, by this deliberate and conscious act of linking its Income to profits of the developer company, the appellant treated this as a bus ness venture and it was no more a simple case, of giving land for development. Thus, there is fluctuation in the income and though theoretically it may go up, practically it ensures that if there is any downturn, it gets fact red and land owning Cos., though they have no such obligation, end up bearing the loss and lower their profits (as it happened in AY 2009-10).

(o) The appellant might have started as a land owning company with agriculture as its interest. The appellant accordingly might have also purchased land “as a fixed asset” even though it is ‘very much doubtful whether any person (the promoters) would think of concerted buying of nearly 90 acres of land near the city of Hyderabad in the names of twelve related companies under same management, for “agriculture” purpose and would be totally oblivious to the fact of possible appreciation of land in view of its proximity to a growing city. The activity of agriculture, in proximity to a city by a corporate body should have resulted in either a horticultural unit (like grape garden) or a floricultural unit or a nursery unit at the least. Instead there was no activity and lands remained vacant and the appellant even paid wealth tax for such “unproductive” lands.

(p) The original interest and objective in purchase of land and the original business as per objectives of MOU of the company therefore pale into insignificance when viewed in terms of what was actually done all these years even before the inking of the development agreement. This clearly showed that the land owning by a Co. was a legal device rather than any “agricultural objective.” Secondly, the actual transaction as it was entered and executed is what that reveals the motive and intention to judge as to whether it is a business transaction or a transaction of “capital gains”.

(q) The transaction entered into, was clearly with an idea to do a real estate venture and profit. The appellant had there fore structured’ a real estate venture as a “development agreement” and that to, with its sister company under the same management. The profits were linked to the profits of the developer even though it had no business to do so as per the development agreement. This is the real reason for the difference in the execution of this development agreement when compared to other development agreements.”

12. On the basis of the reasons given above, the learned CIT(A) held that the intention behind the entire transaction on the part of the assessee was clearly established as that of adventure in the nature of trade and therefore, profit arising from the said transaction was chargeable to tax under the head ‘profits and gains of business/profession’ as rightly held by the Assessing Officer and not under the head ‘capital gains’ as claimed by the assessee.

13. As regards the alternative contention raised by the assessee relying on the provisions of S.45(2), the CIT(A) held that the very act of the assessee company of linking its income to the developer’s income was sufficient to make it clear that from the beginning, there were no separate and distinct activities of first converting the fixed asset as stock in trade and then exploiting the same commercially. He also noted that the assessee company was neither trading in plots itself nor was holding land as its stock in trade and therefore, the conditions of S.45(2) were not satisfied. He therefore, rejected even the alternative contention raised by the assessee and dismissed its appeal upholding the order of the Assessing Officer for assessment year 2008-09.

14. For assessment year 2009-10, the assessee company had not filed its return of income by the prescribed due date, i.e. 30.9.2009. A notice under S.142(1) was issued by the Assessing Officer to the assessee on 7.6.2010 calling for return of income for assessment year 2009-10. Meanwhile, as a result of confession made by Shri B. Ramalinga Raju in the letter dated 7th January, 2009, various agencies started investigation into the affairs and transactions of the companies belonging to Satyam Group, including M/s. Maytas Properties Ltd., the developer company herein. These investigations revealed that there was liquidity crunch for M/s. Maytas Properties Ltd. and pursuant to the application made by Hill County Owners Association, the Company Law Board passed an order dated 13.1.2011 inducting IL&FS group as the new promoter of M/s. Maytas Properties Ltd. Pursuant to the said order, the IL&FS group became 80% stake holder of M/s. Maytas Properties Ltd. and the management of the fourteen land owners companies, including the assessee company, which by then had become subsidiaries of M’/s. Maytas Properties Ltd., and was also taken over by IL & FS group.

15. In response to the notice issued by the Assessing Officer under S.142(1), the assessee company after initially seeking time, filed its return of income for assessment year 2009-10 finally on 31.3.2011, declaring ‘nil’ income. In the Profit & Loss Account filed alongwith the said return, negative income was shown by the assessee company as a result of increase in the estimated budgeted cost of construction and change in the method of recognition of income, which also resulted in reversal of income. It was submitted that the income for assessment year 2008-09 was recognized by following percentage completion method, which was calculated on the basis of budgeted cost of construction as originally estimated by the developer at Rs.584,72,39,037. It was submitted that the developer company however, revised its budgeted cost estimate to Rs.816,86,27,421 for assessment year 2009-10, as a result of which percentage completion was reduced in assessment year 2009-10 as compared to assessment year 2008-09, resulting in reversal of income.

16. It was claimed by the assessee in this regard that the percentage completion for assessment year 2008-09 was tagged to the projected cost of Rs.584,72,39,037, but owing to the increase in the budgeted cost for assessment year 2009-10, the percentage completion was reduced for assessment year 2009-10 in comparison with assessment year 2008-09. This claim of the assessee was not accepted by the Assessing Officer. According to him, the Revenue for the land owning companies based on the agreements for sale already entered into was fixed and the same could not be in the negative as claimed by the assessee. He also observed that design of the project remaining the same, there was no way that the budgeted cost to the same design could escalate to such an extent as claimed by the assessee within a period of one year. He held that the increase in the estimated budgeted cost as claimed in assessment year 2009-10 was itself flawed and the claim of the assessee of such escalation and calculation of less percentage completion based on such escalation could not be accepted. He held that the percentage completion for assessment year 2009-10 thus has to be calculated based on the budgeted cost upon which the income was reckoned by the assessee company in assessment year 2008-09.

17. For assessment year 2008-09, the assessee company had recognised revenue based on percentage completion of the flats and bungalows for which agreements for sale were entered into. In assessment year 2009-10, the assessee company however, changed its method of revenue recognition and recognised the revenue only in respect of flats and bungalows for which agreements for sale were already registered or the possession was handed over. This new method adopted by the assessee company for recognizing the revenue was not found acceptable by the Assessing Officer. According to him, any agreement for sale, even if it is not registered, can confer rights and privilege of ownership upon purchaser. In this regard, he relied upon the CBDT Circular No. 495 dated 22.9.1987, wherein it was clarified that registration of properties is not a prerequisite for recognizing the revenue. The Assessing Officer also found from the relevant details furnished by the assessee that the developer had received almost 85% of the amount from the customers, with whom agreements for sale were entered into. He also found that there was no event that occurred in the previous year relevant to assessment year 2009-10 to justify the change in the accounting policy and method of revenue recognition adopted by the assessee. He therefore, held that such change adopted by the assessee company to suit its needs could not be accepted.

18. During the course of assessment proceedings, it was also noticed by the Assessing Officer that the developer has passed certain reversal entries as a result of the request purportedly made by some customers for cancellation of the agreement for sale. He also noted that a similar treatment was given by passing reversal entries in respect of some other customers who had filed legal suits against developer. These reversal entries passed by the developer had resulted in decrease in the revenue recognition of the land owners companies including the assessee company. In this regard, the Assessing Officer noticed that neither the developer nor the assessee company had paid back any amount to the customers in the wake of the purported cancellation and legal cases. The Special Auditor had also reported in his report that there was no need to refund any amount in the wake of cancellation of the agreements for sale, as sought by some customers by filing legal cases. It was also found by the Assessing Officer that the collection of amount from the customers was to the tune of 87% of the agreements for sale entered into by the developer company and there was no way by which the assessee company could be denied its share by the developer of these receipts. According to the Assessing Officer, there was thus no uncertainty in collection of the amounts already received from the customer and consequently, no reversal of income could justifiably be made on the basis of cancellation or legal cases. He also noted that such a cancellation in any case was neither agreed by the developer or even by the land owner companies including the assessee company. He therefore held that the reversal of income as claimed by the assessee company on account of cancellation or legal cases could not be accepted.

19. The Assessing Officer accordingly proceeded to recognize/determine the income of the assessee company on the basis of percentage completion in respect of flats and bungalows for which agreements for sale were entered into on the basis of budgeted cost of construction as estimated originally by the developer for assessment year 2008-09. In this regard, he estimated the revenue to be recognized from the bungalows in the case of developer at Rs.65,24,67,353 by taking the percentage completion at 100% in respect of agreements for sale already entered into. Similarly, the revenue to be recognised from apartments was determined by him at Rs.109,71,80,613 in the case of developer by taking the percentage of completion at 59% in respect of agreements for sale already entered into. Thus, the total revenue to be recognised from the project in the case of developer company for assessment year 2009-10 was worked out by him at Rs.174,96,47,966 and on that basis, the revenue to be recognized for all the land owner companies for assessment year 2009-10 was determined by him at Rs.47,24,04,950 being 27% of Rs.174,96,47,966. Since the assessee’s share of land in the total land was 8.15% income of the assessee company for assessment year 2009-10 was worked out by the Assessing Officer at Rs.3,85,01,003 being 8.15% of Rs.47,24,04,950 and the same was brought to tax by him in the hands of the assessee under the head ‘profits and gains of business or profession’, by following his assessment order for assessment year 2008-09, after allowing deduction of Rs.10,47,545 towards cost of land and Rs.14,530 on account of allowable expenditure. Accordingly, the total income of the assessee for assessment year 2009-10 was determined by the Assessing Officer at Rs.3,74,38,9028 in the assessment completed under S.143(3) vide order dated 10.8.2012.

20. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), raising various issues. The first and foremost issue raised by the assessee was relating to the change of method of accounting whereby Revenue was recognized only on the basis of registration of agreements for sale or handing over the possession of the flats/bungalows, as adopted in assessment year 2009-10 in place of the execution of the agreement for sale adopted as the basis for recognizing revenue upto assessment year 2008-09. In this regard, it was submitted by the assessee that following the problems faced by Satyam group of companies, a number of purchasers had tendered their applications for cancellation of agreements for sale and had also filed legal suits against the assessee as well as the developer. It was submitted that as a result of these cancellations/litigations, it was prudent not to recognize the revenue merely on the basis of agreement for sale unless the said agreements were registered or at least the possession of the flats/bungalows was handed over. It was contended that the cancellation/litigation created uncertainties in the generation of revenue and accordingly, the revenue recognised earlier on the basis of agreements for sale was reversed due to cancellation/legal cases following the Accounting Standard 9 on revenue recognition. It was contended that such cancellations/legal cases were as good as sales returns in the trading activity and therefore, the corresponding sale earlier recognized was required to be reversed. It was submitted that the method of accounting was accordingly changed to recognise the income only when there was registration of agreements for sale or at least, where possession was complete and when there was no registration or possession, revenue was not recognised. It was contended that the recognition of income in the earlier year merely on the basis of agreements for sale thus was not correctly made and the method of accounting followed to recognize the income was rightly changed in the year under consideration. It was also contended that all significant risks and rights of ownership are normally considered to be transferred when the legal title passes to the buyer and as these rights are transferred only on registration or on handing over of possession, the assessee adopted registration of sale agreement or handing over of the possession as the criteria to recognize income instead of simply recognizing the income as per the agreement for sale as done in the earlier year.

21. As regards the quantification of income done by the Assessing Officer, by adopting the cost of Rs.584.72 crores, estimated for assessment year 2008-09, it was contended on behalf of the assessee before the learned CIT(A) that the Assessing Officer was wrong to disregard the escalated cost and the consequent revised estimation of cost at Rs.816.86 crores. It was submitted that every project undergoes variation in costs and this is a normal phenomena in the case of housing projects. It was contended that the Assessing Officer however, ignored this reality and chose to adopt the cost of Rs.584.72 crores estimated for assessment year 2008-09 to determine the income of the assessee for assessment year 2009-10 as well. It was pointed out that the actual expenditure incurred for the project by 31.3.2013 was Rs.675 crores, which alone was sufficient to show that the budgeted cost of Rs.584.72 cores adopted by the Assessing Officer was incorrect.

22. As regards the head under which income in question was chargeable to tax in its hands, the assessee company reiterated before the learned CIT(A) the same submissions as made during the course of appellate proceedings for assessment year 2008-09 in support of its stand that the same was taxable under the head ‘capital gains’ and not ‘profits and gains of business or profession’. Certain errors committed by the Assessing Officer while computing income for the year under consideration i.e. assessment year 2009-10, were also brought to the notice of the learned CIT(A) by the assessee company and a request made that although an application for rectification filed by the assessee for rectification of the said mistakes under S.154 was rejected by the Assessing Officer, a finding may be given on this aspect as well.

23. After considering the submissions made by the assessee and perusing the relevant material on record, the learned CIT(A) first decided the issue regarding the head of income under which the income determined by the Assessing Officer was chargeable to tax in the hands of the assessee. In this regard, he relied on the findings given by him on a similar issue as involved in the assessment year 2008-09 and following the same, he held that income in question was chargeable to tax in the hands of the assessee as business income and not capital gain.

24. As regards the change in the method of accounting as adopted by the assessee for recognizing the income for the assessment year under consideration i.e. assessment year 2009- 10, the learned CIT(A) held that apart from the reasons given by the Assessing Officer, there were following fundamental reasons for not accepting the change in the method of accounting adopted by the assessee:—

“(a) It is not a simple case of recognizing income based on only sale registrations actually done or possession handed over is a vis income as per sale agreements. Firstly, the appellant had never offered income on the transfer of land for development at the time or in the year when the development agreement was signed or when physical possession of land was handed over to the developer. Till date it is never categorically earmarked or asserted as to the exact extent of built up area that would come to appellant’s share or, in more practical terms, how many flats or villas have actually come to its share and how many of them have been sold. If this was known then the original profits on transfer of land to developer would have been computed and subsequently whenever a villa/flat out of those which had come to appellant’s share is sold, profits on such second transaction would have been worked out. This was never available and the appellant had consciously adopted to link its income to 27% of income of developer from the project and filed returns for AY 2008-09. Now it cannot reverse the entire method of accounting even though the developer still continues with the same method of accounting receipts on the basis of AFSs entered into.

(b) The appellant therefore should first offer income on transfer of lands to developer by quantifying and specifying its share of built up area in terms of number of flats and villas and then thereafter offer the income on sale of such flats/villas as and when registered. The method of accounting adopted by the appellant in AY 2008-09 was discussed in detail in the appellate order passed for AY 2008-09. The appellate elder details how the appellant made the working without actual reference to built up area received or its cost even though the appellant in the tax return, appeared to of income under long term capital gains on account of land transfer and short term capital gains on sale of flats/villas. The relevant portion of the appellate order for A.Y. 2008-09 is therefore extracted below to illustrate the accounting methodology adopted in AY 2008-09:-

The appellant cannot change the method to’ suit the current needs and especially so when it marks a fundamental departure in its very method of computation of income.

(d) It is also to be stated that registration is only final culmination of a long process. Agreements are equally valid to recognize revenue on accrual basis. Further, it is not as if the entire consideration amount is being recognized. Only a part of it is being recognized by the developer by linking the revenue recognition of such receipts to percentage completion of work method.

(e) The appellant had made much about the department’s attachment proceedings u/s 281B and its stoppage of registrations. It is to be seen that the main developer/builder, who is also registering actual property and who is under actual fire and who is accountable to buyers and public is not using this reason to change its method recognizing revenue from AFSs. This is because of two ons. The developer had already received substantial portion of consideration for sale (85% and above as mentioned in the assessment order) and was also doing the construction work and to that extent, even as per accounting norms, acknowledged that already a certain portion of the sale receipts had accrued to it as revenue and so should be offered to tax. The percentage of such receipts accrued to it as mathematically arrived at through percentage completion method, which is an accepted procedure as per Accounting Standards. The second reason is that the attachment by the revenue u/s 281B is only to ensure that the sale registration does not take place without its knowledge and to keep track of receipts that would be realized on sale. It is therefore always taken as a temporary restraint which can always be lifted if proper arrangement for payment of tax is made.”

For the reasons given above, the learned CIT(A) upheld the action of the Assessing Officer in rejecting the change in the method of accounting adopted by the assessee to recognize the income for assessment year 2009-10.

25. Having upheld the action of the Assessing Officer in rejecting the change in the method of accounting adopted by the Assessee for recognition of income for assessment year 2009-10, the learned CIT(A) proceeded to consider the issue relating to the quantification of income of the assessee. In this regard, he noted that the assessment order passed by the Assessing Officer in the case of the assessee company was not really an independent assessment, in the sense that the computation of income of the assessee and other thirteen other land owning companies was determined by the Assessing Officer on the basis of the income from the project as computed in the case of the developer company, i.e. M/s. Maytas Properties Ltd. He found that a draft assessment order passed in the case of the said company computing the income of that assessee from the project was served on that company on 7.10.2013 and the objections filed by that company against draft assessment order were pending before the Dispute Resolution Panel. According to the learned CIT(A), quantification of the income of assessee company as well as other thirteen land owning companies thus was consequential and linked to the computation of income of the developer company, Viz. M/s. Maytas Properties Ltd. and since the issue of computation of income of M/s. Maytas Properties Ltd. was pending before the Dispute Resolution Panel, he refrained from deciding the issue and left the same open in respect of (a) change in the budgeted cost estimation and (b) reduction of receipts attributable to legal cases/cancellations, with a direction to the Assessing Officer to decide the same as per the findings of the DRP in the case of developer company on its adjudication.

26. As regards the mistakes pointed out by the assessee in the computation of income as made by the Assessing Officer, the learned CIT(A) found himself in agreement with the stand of the assessee that the income determined by the Assessing Officer as a result of mistakes committed was in excess by Rs.40,90,710. Accordingly, he directed the Assessing Officer to reduce the income of the assessee company by Rs.40,90,710. Accordingly, the appeal filed by the assessee before him for assessment year 2009-10 was partly allowed by the learned CIT(A). Aggrieved by the order of the learned CIT(A) for the assessment year 2009-10, both the Revenue and the assessee have preferred their appeals before the Tribunal.

27. The main common issue involved in this case as raised in grounds no.2 and 3 of the assessee’s appeal for assessment year 2008-09 and grounds No.3 and 4 of the assessee’s appeal for assessment year 2009-10 relates to the determination of the head of income under which the income arising to the assessee from the transfer of land as a result of development agreement and subsequent sale of flats and bungalows received as consideration for the sale of land is chargeable to tax in its hands, while the incidental issue which is directly linked with this main issue relating to the assessee’s alternative claim for determining its income as per the provisions of S.45(2) of the Act is raised in ground No.4 of the assessee’s appeal for assessment year 2008-09 and ground No.5 of the assessee’s appeal or assessment year 2009-10.

28. The learned counsel for the assessee submitted that the assessee company as well as other thirteen land owning companies were incorporated with the main object of acquiring agricultural lands and carrying on agricultural operations. He submitted that all these fourteen companies independently purchased the agricultural lands with a view to carry on agricultural operations and such lands purchased by them during the year 2002 aggregated to about 97 acres. He submitted that these agricultural lands were shown in the books of account of all the companies as capital assets and they continued to be held as capital assets till the end of the year 2005, when a development agreement was entered into with the developer company, M/s. Maytas Properties Ltd. on 30.12.2005. He contended that prior to the date of development agreement, lands in question thus were held by the assessee companies as capital assets and there was nothing whatsoever to show that the said lands were acquired and held by the assessee companies as stock in trade for the purpose of carrying on any business. He contended that the Assessing Officer however ignored all these material facts of the case and treated the income arising to the assessee companies from the transfer of lands as a result of development agreement as business income merely on the basis that agricultural activities were not carried on by the assessee companies. He contended that there was nothing to show that the agricultural lands were purchased by the assessee company as stock in trade and the Assessing Officer as well as the learned CIT(A) ought to have looked into the intention of the assessee company at the time of purchase of land. He contended that they, however, decided this issue regarding the nature of lands relying on the subsequent events ignoring the intention of the assessee company as prevalent at the time of acquisition or purchase of lands, which was very clearly to acquire the said land as capital asset for carrying out agricultural operations. He contended that the allegation of the authorities below that the intention of the group as such right from the beginning was to acquire the land for the purpose of business of real estate development is baseless, as the developer company was incorporated only in the year 2005 whereas lands were purchased by the land owing companies in the year 2002. He contended that even the various events enumerated and relied upon by the Assessing Officer to hold that the entire activity was business activities have happened during the post-development agreement period and the said events, at the most, can only show that the activities carried on by the assessee company, after the execution of development agreement are in the nature of business activities. He contended that in this scenario, the assessee company can be said to have converted their agricultural land held as capital asset into stock in trade on the date of development agreement and the alternative contention of the assessee company will come into play, at this juncture, so that the income earned by the assessee company can proportionately be brought to tax partly as capital gains and partly as business income.

29. As regards the applicability of the provisions of S.45(2) to determine the income of the assessee company, the learned counsel for the assessee submitted that the market value of the land as on the date of conversion is required to be arrived at and after allowing deductions for the indexed cost of acquisition of the land, the capital gain chargeable to tax can be worked out, which becomes taxable on proportionate basis in the relevant year, when the flats/bungalows received by the assessee company as sale consideration as per the development agreement are sold alongwith the undivided share in the land. He submitted that as per the development agreement entered into on 30.12.2005, the assessee became entitled to receive 27% of the (built up) constructed area in lieu of 73% of the land area and taking the date of conversion of capital asset into stock in trade as 30.12.2005, the market value of the 73% of the land area can be taken as cost of construction of 27% area. He submitted that since the cost of construction of the total project was estimated by the developer at Rs.410 crores, the cost of construction of 27% of the total project taken on proportionate basis at 110.70 crores can justifiably be taken as the market value of 73% of the land area, converted by the assessee into stock in trade. He submitted that the market value of the land as on 31.12.2005 thus would be Rs.110.70 crores being 27% of the estimated cost of construction and this amount has to be taken as consideration received by the assessee for 73% of the land area and after allowing deduction on account of indexed cost of acquisition of 73% of the land area, the long term capital gains is required to be worked out. According to him, as and when the land owning companies have sold the constructed area, proportionate long term capital gain relating to the undivided share of land attributable to such constructed area can be taxed in the hands of the assessee company and the amount received over and above can be taxed as business income. The learned counsel for the assessee also furnished a working showing how the entire income earned by the assessee company can be brought to tax in the hands of the assessee company partly as capital gains and partly as business income by applying the provisions of S.45(2) of the Act. The working furnished by the learned counsel for the assessee is as under:—

“Calculation of Capital Gain and Business Income u/s.45(2)

30. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below in support of the revenue’s case that the intention of the assessee company right from the beginning was to acquire the land for the purpose of real estate development and the same, therefore, constituted an adventure in the nature of trade. He contended that the entire income of the assessee company from the transfer of the said land as a result of development agreement as well as sale of flats and bungalows received as consideration for sale of land, therefore, is chargeable to tax as business income as rightly held by the authorities below. As regards the alternative contention of the learned counsel for the assessee for computing the income of the assessee partly as capital gain and partly as business income by applying the provisions of S. 45(2) of the Act, the Learned Departmental Representative submitted that if the same is found to be acceptable by the Tribunal, suitable directions may be given to the Assessing Officer regarding the manner in which the income of the assessee company chargeable to tax under the head ‘capital gains’ and ‘business income’ is required to be computed in the facts and circumstances of the case.

31. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessee company as well as other thirteen land owning companies were incorporated with their main object to carry on the agricultural activities and there is no dispute about the same. In order to pursue this main objects, these companies purchased agricultural lands in the year 2002 and the lands so purchased were treated by them in the books of account as capital asset upto 30 December, 2005 when the said lands were transferred to a developer company, M/s. Maytas Properties Ltd. by way of development agreement. Although there was no agricultural activities actually carried on by the assessee as well as other thirteen land owning companies till the date of development agreement, expenditure was incurred by them for leveling of the land and laying roads, etc. There is, however, nothing brought on record to show that there was any intention on the part of the assessee company to carry on the business of real estate development by using the lands acquired by them as stock in trade. On the other hand, the primary evidence in the form of objects of the assessee company, entries in the books of account etc. was clearly in favour of the assessee to show that the lands were acquired and held by them up to the date of development agreement as capital assets and there is nothing to dislodge this position emerging from the primary evidence.

32. The Assessing Officer as well as the learned CIT(A) have relied on various events to arrive at a conclusion that the intention of the assessee companies right from the beginning was to acquire and hold the lands as stock in trade for the purpose of carrying on the business of real estate development. However, most of the events relied upon by the authorities below are subsequent events occurring after the date of development agreement and the same in our opinion, cannot be relied upon to come to the conclusion that the intention of the assessee company right from the beginning was to purchase the land as stock in trade for carrying on real estate development business.

33. In order to ascertain whether it is a case of capital asset or stock in trade, the intention at the time of acquisition thereof is material and the subsequent events cannot change the nature of the asset, which is to be determined on the basis of the intention of the assessee at the time of acquisition. In the present case, the intention of the assessee company as gathered from the main object for which it was established and the accounting treatment given in the books of account was to acquire the lands as capital assets, in order to carry on agricultural operations and the subsequent events mostly occurring after the date of development agreement, in our opinion, cannot change the nature and character of the land into stock in trade which was otherwise acquired and held by the assessee company at least upto the date of development agreement as capital asset. Moreover, the land after its acquisition and before entering into development agreement was declared by the assessee company in its Wealth Tax returns as capital asset and the same was accepted by the Department. It is also worthwhile to note here that the developer company was incorporated only in the year 2005, while all the land-owning companies were not only incorporated in the year 2002 even the lands in question were acquired in the year 2002. It therefore, cannot be said that the intention of the group as a whole right from the beginning was to acquire the lands for property development and such allegation made by the Assessing Officer is without any basis. As such, considering all the facts of the case as borne out from the record, we are of the view that the lands in question were acquired and held by the assessee upto to the date of development agreement as capital asset and the profits arising from the transfer thereof as a result of development agreement entered into with the developer company is chargeable to tax as capital gain and not business income.

34. Having held that the land in question was acquired and held by the assessee company as capital assets upto the date of development agreement, the next question that arises for our consideration is what is the position during the period post development agreement in the sense whether there was any change in the nature of lands owned by the assessee as a result of events occurring after the date of execution of development agreement. At this juncture, it is necessary to take judicial note of the common practice being followed in the case of transfer of land as capital asset to the developer as per the development agreement. In many such cases, the consideration for transfer of land is being paid by the developer and accepted by the land owner in the form of certain percentage of built up area. For example, 30% of the total built up area of the project is agreed as consideration to be paid by the developer to the land owner as a consideration. In such a case, what the land owner effectively transfers to the developer is 70% of the total land, as the balance 30% of the total land area is retained by him, being the undivided share in the land attributable to the 30% built up area to which he is entitled to receive form the developer as consideration. The purpose or intention to accept sale consideration in the form of built up area on the part of the land owner is either to replace one capital asset, i.e. land by another capital asset, i.e. built up area, or to sell the built up area to third parties in order to make more profit. In case of former, the new capital asset is retained and held by the land owner either for his own use or as long term investment and the sale thereof results in capital gains, long term or short term depending on the period of holding. In the latter case, the land owner practically becomes dealer in built up area, having an intention to make more profit as a result of increase in the market rate on sale of the built up area. In the process, he also indirectly undertakes the risk associated with execution and completion of project as well as fluctuation in market rate of units. In such cases, the built up area takes the form of stock in trade and the excess profit earned by the land owner as dealer over and above the cost of built up area to him takes the character of business income chargeable to tax in his hands under the head ‘profits and gains of business or profession’. The facts involved in the present case are such that they get covered by the latter category and the inevitable conclusion that follows is that the land held as capital asset got converted into stock in trade, as a result of the development agreement. The following events pointed out by the Assessing Officer further support our conclusion that there was conversion of lands held as capital asset into stock in trade by the land owning companies, as a result of the execution of development agreement and consequently, the profit arising from sale of flats and bungalows alongwith undivided share in land was chargeable to tax in the hands of the assessee company, partly as capital gains and partly as business income-

1. The Development agreement makes it clear that the 14 landlords (14 companies) decided to pool together the individual land extents owned by them so as to get better and maximum advantage and income on the property

2. Subsequent to the development agreement, the developer M/s. Maytas Properties actually acquired majority share holding in all these 14 land owning companies and made them subsidiaries.

3. M/s. Maytas Properties Ltd. pledged land owned by these 14 companies as collateral security and obtained huge loans from Axis Bank, State Bank of India, IDBI Bank, State Bank of Mauritius

4. Maytas adopted percentage completion method to recognize revenue and determined profit. 27% of this profit was passed on to the land owning companies including the appellant company, who then shared this profit in the ratio of land holdings.

5. The assessee company too systematically followed revenue recognition by project completion method and its activities can be identified with a systematic business activity by any other company.

6. The development agreement was in 2005 and the lands were also taken over by the developer in 2005. Yet, the appellant/assessee company did not offer any income under the head capital gains in its relevant period. Thus, the assessee was itself not clear about the treatment of revenue received.

7. The assessee company never carried out any of its activities in isolation. All activities were undertaken jointly with other 13 land owning companies. As a single business venture for all practical purposes, verification of the sale deed executed in favour of various flat/bungalow buyers also indicated that for the registration of undivided share of land, the entire pooled land of about 85 acres was taken as single piece of land and the sale proceeds received from various flat/bungalow buyers was passed to the land owning companies in the ratio of their land holdings.

35. The position that emerges in the case of the assessee company as a result of development agreement as well as subsequent events enumerated above is similar to the one as envisaged in S. 45(2)of the Act, and we, therefore, find merit in the alternative contention of the learned counsel for the assessee that the income arising from transfer of land by way of development agreement and subsequent sale of flats and bungalows received as sale consideration for transfer of land is required to be computed as per the provisions of S.45(2). The question, however, is how to give effect to the provisions of S.45(2) in the facts and circumstances of the case, so as to determine the income of the assessee chargeable to tax under the head ‘capital gains’ and ‘business income’. Although the learned counsel for the assessee has prepared and furnished a working showing how this could be done, we find that the same suffers from certain mistakes and fails to give proper and full effect to the provisions of S.45(2). The Learned Departmental Representative has also urged that if the provisions of S.45(2) are held to be applicable in the case of the assessee, suitable directions may be given to the Assessing Officer, as regards the manner in which the income of the assessee has to be computed by applying the provisions of S.45(2) of the Act.

36. As per the provisions of Sub-section (2) of S.45, the profits and gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by as stock in trade of a business carried on by him is chargeable to income-tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him, and for the purpose of S.48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

37. In the present case, there was not only conversion by the assessee company of land held as capital asset till the date of development agreement into stock in trade, but there was also a change in the form of capital asset in as much as in lieu 73% of the land area, what the assessee company got on conversion was 27% of the total built up area of the project. The remaining 27% of the land area continued to be held by the assessee company, but as stock in trade on conversion. Thus, as a result of development agreement, there was conversion of capital asset into stock in trade as well as change in the form of asset in the sense that in place of 100% land area held as capital asset, the assessee company got 27% of the total built up area of the project alongwith proportionate undivided share in land as stock in trade, which became available to it for the purposes of dealing during the post development agreement period.

38. In so far as computation of capital gain on such conversion is concerned, S.45(2) specifically provides that the fair market value of the asset on the date of conversion for the purposes of S.48, shall be deemed to be the full value of consideration realised or accruing on transfer of the capital asst. In the present case, 27% of the built up area of the project was received by the assessee as consideration for transfer of 73% of the land area, and therefore, cost of construction of this 27% area can reasonably be taken as the fair market value of 73% of the land area on the date of conversion. As submitted by the learned counsel for the assessee in this regard, the total cost of construction of the project was initially estimated by the developer at Rs.410 crores for the total built up area of 26.94 lakhs sq. ft. which gives the rate of cost of construction at around Rs.1,500 per sq. ft. Applying the said rate, the cost of construction of the 27% of the total built up area of the project comes to around Rs.110 crores and the same, in our opinion, can reasonably be taken as fair market value of the 73% of the land area and accordingly, fair market value of the total land can be worked out on pro-rata basis, for adopting the same as full value of the consideration received or accruing as a result of the transfer of the capital asset for the purposes of S.48 in order to compute the capital gains. From the value so adopted, indexed cost of acquisition of the asset can be reduced in order to compute the capital gains arising to the assessee company on transfer of land by way of development agreement, which simultaneously resulted in conversion of capital asset into stock in trade. This capital gains would be chargeable to tax in the hands of the assessee company on pro rata basis as and when the stock in trade in the form of flats and bungalows comprised of built up area and proportionate share in land is sold, while the amount received over and above the cost of such flats and bungalows would be chargeable to tax in the hands of the assessee company as business income. The following illustration based on hypothetical figures giving the working of capital gains and business income would make the matter abundantly clear-

COMPUTATION OF CAPITAL GAINS AND BUSINESS PROFIT

If stock in trade of 3000 sq. ft is sold as follows:

39. In view of the above discussion, we direct the Assessing Officer to compute the income of the assessee form transfer of land held by the assessee company as capital asset by way of development agreement and subsequent sale of flats and bungalows received as consideration for such transfer which took the character of stock in trade on conversion in the manner and as per the method specified above, relying on the provisions of S.45(2). We accordingly partly allow grounds No.2 and 3 of the assessee’s appeal for assessment year 2008-09 and grounds No.3 and 4 of the assessee’s appeal for assessment year 2009-10. Ground No.4 of the assessee’s appeal for assessment year 2008-09 and ground No.5 of the assessee’s appeal for assessment year 2009-10 are allowed.

40. As regards the other issues raised in grounds No.6 and 7 of the assessee’s appeal for assessment year 2009-10 relating to the change in the method of accounting followed by the assessee to recognize the income, we are of the view that the same have become virtually redundant as a result of our decision rendered above holding that the income of the assessee company from the relevant transactions is liable to be computed as per the provisions of S.45(2). The only aspect that may be relevant for the purpose of applying the provisions of S.45(2) is the point at which the flats and bungalows representing stock in trade can be taken as sold or otherwise transferred for the purpose of recognising income. In this regard, it is observed that a similar issue has a been considered by us in the case of developer company, viz. Addl. CIT v. Hill Country Properties Ltd.[2015] 57 taxmann.com 400 (Hyd.) (Earlier known as M/s. Maytas Properties Ltd.) and the same has been decided vide order of even date passed in ITA No.1644/Hyd/2014 by observing as under:—

“35. In so far as the second aspect of the matter is concerned, it is observed that the claim of the assessee for change in the method of recognizing the revenue on the basis of registration of agreements for sale or handing over possession of the units to the agreement holders is based on prudential norms of revenue recognition and the same is supported by Accounting Standard 9, which clearly states that the key criterion for determining when to recognize the revenue from a transaction involving sale is that the seller has transferred the property in the goods to the buyer for a consideration. It is clarified that the transfer of property in goods results in or connotes the transfer of significant risks and rewards of ownership to the buyers. Further, there may be situations, where transfer of property in fact does not coincide with the transfer of significant risks and rewards of ownership. Cases may arise where delivery has been delayed due to the fault of the seller and the goods are at the risk of the parties at default.

36. As per AS-9, recognition of revenue requires that revenue is measurable and that at the time of sale, it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, Revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. When the uncertainty relating to collectabilty arises subsequent to the time of sale, it is more appropriate to make a separate provision to reflect the uncertainty. It is also provided that when recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.

37. In the present case, as a result of extra-ordinary events witnessed by the Satyam group of companies to which the assessee company belonged in the month of January, 2009, there was uncertainty with regard to the completion of project by the assessee company and delivery of units booked. Keeping in view this uncertainty, some of the agreement holders tendered applications for cancellation of the units booked and demanded refund of the advances paid. Some of the agreement holders also filed cases against the assessee company for cancellation of the agreements and refund of the amounts paid by them. The ultimate collection from these agreement holders thus became uncertain and the assessee company, in our opinion, rightly decided to postpone the revenue recognition to the extent of such uncertainty, by adopting the new method of recognition of income on the basis of registration of agreements for sale or handing over of possession of the units, as the same enabled it to assess the ultimate collection with reasonable certainty. As a matter of fact, the claim made by some of the agreement holders cancellation of agreements for sale already executed and for refund of the advances already paid crated uncertainty relating to collectability which arose even after the of the agreements for sale, and this uncertainty was also provided for by the assessee by reversing the income already recognized on the basis of execution of the agreements for sale. The change in the method of recognition of income, as adopted by the assessee company in the year under consideration as well as the consequent reversal of income on the basis of cancellation/legal cases thus was in terms of the relevant Accounting Standard laying down prudential norms of revenue recognition, and as held by the coordinate bench of the Tribunal in assessee’s own case for assessment year 2008-09, the same was legally correct under the mercantile system of accounting followed by the assessee company. It is pertinent to note here that the AP State Consumer Dispute Redressal Commission, Hyderabad (vide its order at pages 38 to 55 of the paper book) as well as National Consumer Disputes Redressal Commission, New Delhi (vide order at pages 56 to 87 of the assessee’s paper- book) subsequently allowed the claim of the agreement holders seeking cancellation of the agreements for sale and also directed the assessee company to refund the amounts paid by them along with interest, and even the SLP filed by the assessee against the order of the National Consumer Dispute Redressal Commission was dismissed by the Hon’ble Supreme Court. These subsequent events clearly show that there was an uncertainty in assessing the ultimate collection and revenue recognition was rightly postponed by the assessee company to the extent of such uncertainty involved by changing the method of recognition of income as well as providing for reversal of revenue already recognised earlier on the basis of cancellations/legal cases.”

Following our decision rendered in the case of Hill County Properties Ltd. (supra), we direct the Assessing Officer to adopt the date of registration of agreement or possession of units as the date of sale of units for the purpose of computing the income of the assessee as per the provisions of section 45(2) of the Act.

41. The issues raised in ground No.5 of the assessee’s appeal for assessment year 2008-09 and grounds No.8 and 9 of the assessee’s appeal for assessment year 2009-10 relating to the levy of interest under S.234A and S.234B are consequential and the Assessing Officer is accordingly directed to allow consequential relief to the assessee on this issue.

42. As regards the appeals filed by the other thirteen assessee companies, it is observed that all the issues involved therein as well as material facts relevant thereto are similar to the case of M/s. Goman Agro Farms Pvt. Ltd., except that in the case of two companies, viz. M/s. Konar Greenlands Pvt. Ltd and M/s. Swrnamukhi Greenfields Pvt. Ltd., there are no appeals filed by the assessee for assessment year 2008-09. We therefore, follow our decision rendered on the similar issues in the case of M/s. Goman Agro Farms Ltd. (supra) and decide the issues involved in the case of other thirteen companies accordingly.

REVENUE’S APPEALS:

43. In its appeals for the assessment year 2009-10, the solitary common issue raised by the Revenue is that the learned CIT(A) was not justified in disposing off the appeal of the assessee, when the issue raised therein relating to reversal of entries was pending before the Dispute Resolution Panel at the relevant time. According to the Revenue, the learned CIT(A) ought to have waited for the order of the Dispute Resolution Panel and should have disposed off the appeal of the assessee only after the decision of the DRP. In our opinion, this issue raised by the Revenue has become infructuous as a result of our decision rendered while disposing off the appeals of the assessee for assessment years 2008-09 and 2009-10 in the foregoing portion of this order. We accordingly dismiss the appeals of the Revenue for assessment year 2009-10.

44. In the result, all the 26 appeals of the assessee are partly allowed and all fourteen appeals of the Revenue are dismissed.