Whether when parties are inter-related in a land transaction, forfeited sums form a part of sale consideration for purpose of computing capital gains - YES: ITAT

THE issues before the Bench are - Whether when the parties are inter-related in a land transaction, the forfeited sums form a part of sale consideration for the purpose of computing capital gains; Whether the amount received towards cancellation of development agreement and towards damages is a capital receipt and Whether when the parties to a contract are interrelated, it cannot be said that the said transaction is of a commercial nature and is at Arm's Length. And the verdict goes against the assessee.

Facts of the case

Assessee, a company had filed its ROI showing a loss of Rs.34,44,373. Later, the AO reopened the assessment on the basis that certain capital gains has escaped assessment. The assessee filed a revised return in response. The AO noted that the assessee had received almost full consideration at the time of execution of the said agreement of sale and irrevocable POA. He further noted that in its balance sheet, under the head "Current Liabilities", the assessee had shown receipt of an amount of Rs.15,76,26,000/- as advance against 'sale of property'. AO

observed that, it was clear that the entire amount including the advances paid by the original developers of the same group, was nothing but the sale consideration for the said land. The AO further noted that the claim of the assessee, that possession of the said land was not given up to 28.02.2008, was not correct. He mentioned that having received full sale consideration, the irrevocable POA assumed the character of regular sale deed. It was further noted that the purchaser had taken the possession of the property immediately and started construction of a multistoried building thereon. With these observations, AO held that there was a clear transfer of the said property within the meaning of sec 2(47). On the basis of assessee's submission, the AO had contended that the entire amount received including the forfeited amount was taxable as sales consideration received for the sale of property. Since the said land was acquired by the assessee before 01.04.1981, after taking into account the MV per sq. yd. of such land at Rs. 60/-, the AO estimated cost of acquisition of the said land measuring to 7236 sq.yds. at Rs.4,34,160/- and accordingly, the indexed cost of acquisition during the year at Rs.21,57,775/-. Since on transfer of such land, the assessee had received total sale consideration at Rs. 15,77,26,000/-, the AO computed the capital gain at Rs.15,55,68,225/- and thus held that the same shall be added to the income of the assessee. Further, the AO noticed that the returned loss of Rs.34,44,373/- claimed by the assessee in the return, includes a sum of Rs.29,42,288/- towards payment of key man insurance. Since, there was no business during the previous year the AO held that the same shall be disallowed and hence he disallowed the same. With the above two additions made to the returned income, the AO completed the assessment u/s.143(3) r.w.s. 147 determining total income at Rs. 5,03,38,658/-. On appeal, the CIT(A) agreed with the findings of the AO.

Before Tribunal, the AR had submitted that there was no specific clause in the development agreement for the forfeiture of deposit, as such the forfeiture of refundable deposit for non performance of contract by the developers within the stipulated time and it cannot be considered as part and parcel of sale consideration. The AR submitted that it was only a mere coincidence that the property was sold to G.S.G. Builders Pvt. Ltd., who is one of the parties to the development agreement. It was further submitted, in the said agreement of sale and irrevocable POA, the MV was shown at Rs. 13 crores. It shows that the market value was not more than Rs. 13 crores. Further, reiterating their earlier submissions that the said amount of Rs. 66,26,000/- was received towards damages for non-compliance of the development agreement, the assessee contended that the said amount can be treated as part of sale consideration. It was further submitted that the amount of Rs. 2 crores was towards refundable deposit which was shown as advance against 'development of property' under current liabilities in the balance sheet. However, in the balance sheet as on 31.03.2005, by oversight, such deposit and the amount of Rs. 66,26,000/- received towards damages from the developers, were shown as advance received against sale of property. The AR further submitted that such amount received on 28.02.2008, cannot be considered as part of sale consideration for the purpose of computing capital gains in the A.Y. 2005-06. The AR contended that the said aggregate amount of Rs. 2,66,26,000/- (Rs. 2 crores + Rs.66,26,000) cannot be considered as part of sale consideration. The AR further stated that the said amounts were in the nature of capital receipts. He contended that the same cannot be considered as received towards sale consideration. The AR had submitted that the SC in their decision in the case of Travancore Rubber and Tea Co. Ltd. vs. CIT (243 ITR 158), held that earnest money / deposit, forfeited for non-performance of a contract was not a revenue receipt, but only capital receipt. Therefore, applying the provisions of s. 51, after deducting Rs. 2 crores from an amount of Rs. 4,34,160/- towards cost of property as on 01.04.1981, it gives a negative figure and the excess amount received over and above the cost was to be ignored and was to be held as capital receipt only. Thus, the AR had contended that the amount received by the assessee towards sale consideration was only Rs. 13 crores, but not Rs.15,77,26,000/- as considered by the AO.

On the other hand, the DR had submitted that as seen from the discussions made by the AO in the assessment order and also the material available on record, on basis of the said agreement of sale and irrecoverable POA executed by the assessee on 18.02.2005 with M/s. G.S.G. Builders Pvt. Ltd., AO found that there was transfer of the said property during the P.Y. AO held that those developers and the purchaser of the property belonged to the same group and moreover, it was only an internal arrangement that the said property was ultimately purchased in the name of the above company M/s. G.S.G. Builders Pvt. Ltd., in which Sri Gourisanker Gupta & Smt. Saritha Gupta were directors. It was contended that the same cannot be considered as part and parcel of sale consideration. The DR submitted that from the above stipulation, made in the agreement of sale, the contention of the assessee that the said refundable deposit of Rs. 2 crores was forfeited by it, due to non-performance of contract by the original developers, was devoid of any merit. The DR submitted that since the original developers including M/s. G.S.G. Builders Pvt. Ltd., who was the purchaser in this case, had agreed for retention of the said refundable deposit by the assessee, following execution of the above agreement of sale, it clearly showed, under the circumstance, the said amount constituted part and parcel of the sale consideration in respect of the said property. Regarding the further receipt of Rs.11,00,000, the DR had submitted that the assessee had submitted that since the said amount was received later and not during the previous year under consideration, the same cannot be considered as part of sale consideration. The DR submitted that, in view of the foregoing discussions, the AO was justified in considering the said amount of Rs.15,77,26,000/- as the total sale consideration, arising from transfer of the said property in this case for computing the taxable capital gain.

Held that:

++ we find no force in the argument of the assessee. It is to be noted that all the parties to the transaction are interrelated. The assessee made an attempt to reduce the tax. This is evident from certain clauses of the agreement dated 18.2.2005 which is a sale and irrevocable power of attorney. Clause No. (1) and Clause No. (5) read as follows:

“Due to various unforeseen reasons, the OWNERS and ORIGINAL DEVELOPERS are presently desirous of superseding the EARLIER DOCUMENTS which shall be deemed to have been cancelled hereby in respect of all continuing obligations of either parties to the other and both parties that is to say the OWNERS and the ORIGINAL DEVELOPERS hereto shall be deemed to have fulfilled all their obligations to each other and neither of the parties shall be entitled to make any claims on the other in respect of the contractual obligations of any other parties i.e. the OWNERS, ORIGINAL DEVELOPERS and PURCHASER.”

“(vii)The parties having agreed to the cancellation / superseding of the EARLIER DOCUMENTS by these presence the ORIGINAL DEVELOPERS consequently to hereby record their agreement to the forfeiture of the refundable deposit under the EARLIER DOCUMENTS paid by them to the OWNERS, by affixing their signatures here to.”

++ the assessee’s attempt to evade tax cannot be given any credit and the consideration received through earlier agreement is nothing but a part of the sale consideration received by the assessee towards transfer of the property and it is an attempt by the assessee to mislead the Department. Being so, this kind of conduct of the assessee cannot be encouraged and the reliance placed by the assessee's counsel in the case of Smt. Smitha N. Shah cannot be applied as the parties in that case with whom Smt. Smitha N. Shah entered into agreement are not interrelated parties and the transaction in that case is an Arm’s Length Transaction. The findings in the case of Arms Length Transaction cannot be applied to the transaction of the assessee, where the parties were interrelated and the assessee involved in tax evading methods. Accordingly, we are inclined to confirm the order of the CIT(A) on this issue and the grounds raised by the assessee dismissed.