1 R IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 11TH DAY OF JUNE, 2015 PRESENT HON BLE MR. JUSTICE MOHAN M. SHANTANAGOUDAR AND HON BLE MR. JUSTICE ARAVIND KUMAR I.T.A. No.75/2009 BETWEEN: 1. Commissioner of Income-Tax Central Circle C.R. Building Queens Road Bangalore 2. Assistant Commissioner of Income-Tax Central Circle-2(3) C.R. Building Queens Road Bangalore .. Appellants (By Sri K.V. Aravind, Standing Counsel for appellants) 2 AND : Sri Dinesh D. Ranka 3rd Floor, Ranka Chambers No.31, Cunnigham Road Bangalore-560052 ..Respondent (By Sri S. Parthasarathi, Adv.,) This appeal filed under Section 260-A of Income Tax Act, 1961 is arising out of order dated 10.10.2008 passed in ITA No.1163/Bng/2007, for assessment year 1999-2000. This appeal is filed praying to formulate substantial questions of law stated in appeal and to allow appeal and set aside order passed by Income Tax Appellate Tribunal, Bangalore and confirm order of Appellate Commissioner confirming order passed by Assistant Commissioner of Income Tax, Central Circle-2(3), Bangalore. This appeal having been heard and reserved for Judgment, coming on for pronouncement of Judgment this day, MOHAN M. SHANTANAGOUDAR .J., delivered following. JUDGMENT This appeal is filed by Revenue against order passed by Income Tax Appellate Tribunal, Bangalore Bench in ITA No.1163/ Bang/07 (Assessment year 1999- 3 2000). appellant has sought confirmation of orders passed by Commissioner of Income Tax (Appeals)-VI { Appellate Commissioner for short} as well as Assistant Commissioner of Income Tax, Central Circle 2(3), Bangalore. 2. This appeal came to be admitted to consider following substantial question of law: Whether Tribunal was correct in holding that amount received of Rs.3.47,75,000/- by assessee from L & T, developer of adjoining land in respect of transfer of 7575.37 square meters of FAR in assessee s residential plot measuring 1.6 acres is not transferable as same is not capital asset and consequently no capital gains can be levied? 3. Brief facts of case are as under: respondent assessee is carrying on business in real estate. Admittedly, he owned 35 acres 6 guntas of 4 land at Kothanur Village. entire land was converted from agriculture to housing purposes in year 1992. Bangalore Development Authority approved plan for residential group housing scheme over said land. Subsequently, plan was renewed on 19.2.1998. plan covered entire area of 35 acres 6 guntas and same was signed by respondent as owner. total Floor Area Ratio ( FAR for short) area sanctioned for project consisting of 35 acres and 6 guntas is 2,61,912.30 square meters. Out of same, FAR relating to 1 acre 6 guntas would be 8589.53 square meters. Out of total extent of 35 acres 6 guntas of land, area of 34 acres was subject matter of Joint Development Agreement dated 19.10.1995 entered into between respondent and Larsen & Tourbo Limited ( L & T for short). remaining extent of 1 acre 6 guntas of land was not covered under Joint Development Agreement entered into between parties. Admittedly, said area of 1 acre 6 guntas of 5 land was kept by respondent for his personal use i.e., for construction of his residential house. In respect of assessment year 1999-2000, assessee filed return of income on 14.2.2000 declaring total income of Rs.4,90,000/-. assessment under Section 143(3) of Income Tax Act ( Act for short) came to be concluded determining total income at Rs.5,20,000/-. search came to be conducted in premises of Assessee under Section 132 of Act on 4.2.2004. Certain documents were seized. It was found from seized records that income earned from Joint Development Agreement entered into by assessee with L & T was shown year after year under head income from business . Though assessee had retained area of 1 acre 6 guntas for his personal purposes and though total FAR which was available for assessee in respect of area of 1 acre 6 guntas retained by him 6 was 8589.53 square meters, assessee gave up 7575.37 square meters in favour of L & T (which is developer of remaining adjoining property measuring 34 acres) and consequently, assessee retained FAR relating to 1,014.16 square meters only. This was detected from seized document vide A/DDR-1/5 at pages 46 and 64 under head 1.6 Account . seized document also disclosed that amount of Rs.3.15 crores was paid by L & T to respondent for utilizing FAR relating to 7575.37 square meters. Pursuant to search, notice under Section 153-A of Act came to be issued by Revenue to assessee and in response to said notice, assessee filed return of income declaring loss of Rs.1,28,668/-. 4. Assistant Commissioner of Income Tax, Central Circle 2(3), Bangalore framed assessment order on 31.1.2006 under Section 143(3) r/w Section 153A of 7 Act. Assessing Officer held, on facts that FAR of 7575.37 square meters out of total extent of FAR of 8589.53 square meters relating to 1.6 acres of land retained by assessee is taken over by L & T for utilizing same in its adjoining project (which was coming up in 34 acres of land, which is subject matter of Joint Development Agreement between L & T and assessee) for advance consideration of Rs.3.15 crores and same would amount to transfer which is liable to capital gain tax. Consequently long term capital gains were worked out to Rs.2,48,45,970/-. It is also concluded by Assessing Officer that assessee has not declared long term capital gains either in original return or in return filed consequent to notice issued under Section 153A of Act and assessee had concealed particulars of income and consciously tried to evade tax and therefore penalty proceedings under Section 271(1)(c) was initiated. 8 5. assessment order passed by Assessing Authority against assessee was questioned by assessee before Commissioner of Income Tax (Appeals) { Appellate Commissioner for short} in Appeal No. ITA 315/ACIT.Cen.Cir.2(3)/CIT(A)-VI/2005-06/BLR vide Annexure-B. Appellate Commissioner on re- appreciation of entire material on record concluded that relinquishment of FAR of 7575.37 square meters by assessee in favour of L & T comes within definition of transfer as found in Section 2(47) of Act and therefore Appellate Commissioner held that capital gains have arisen to assessee. Consequently, Appellate Commissioner upheld addition of Rs.2,48,45,970/- under head of capital gains . 6. orders passed by Assessing Officer as well as Appellate Commissioner were carried further in appeal by assessee before Income Tax Appellate 9 Tribunal, Bangalore Bench in ITA No.1163/Bang/07. Tribunal allowed appeal filed by assessee and set aside orders passed by Assessing Officer as well as Appellate Commissioner by its order dated 10.10.2008 on ground that area of 1 acre 6 guntas retained by assessee is not capital asset and it was not transferred by assessee in favour of Developer and there was no transfer of immovable property as defined under Section 2(47) of Act. Hence, Revenue has filed this appeal questioning order passed by Income Tax Appellate Tribunal, Bangalore Bench and consequently prayed for confirmation of orders passed by Assessing Officer and Appellate Commissioner. 7. As aforementioned, assessee was exclusive owner of 1 acre 6 guntas of land which adjoins 34 acres of land. said area of 1 acre 6 guntas of land was held by 10 assessee for his personal use. adjoining property of 34 acres was subject matter of Joint Development Agreement dated 19.10.1995 between assessee and L & T (Developer). It is also relevant to note that assessee, who had paucity of funds, approached one Mr. Udhav H Buxani who provided financial assistance to assessee and in agreement dated 20.9.1993, it was decided that profits will have to be shared between assessee and Udhav H Buxani equally. As aforementioned, assessee entered into joint development agreement with L & T for developing 34 acres of land. project was called South City. assessee has received Rs.5.00 crores as interest free deposit. Out of which, Rs.2.50 crores was non-refundable. As per joint development agreement, assessee was to receive 25% of built up area. It was also agreed that since building was being constructed by developer (L & T), saleable space alongwith amenities and undivided 11 rights and interest in land could be shared between assessee and developer in ratio of 25% and 75% respectively. Out of such 25% of profit earned by assessee, Udhav H. Buxani would be entitled to 50% of said profit i.e., 12 % of total built up area/profit. It was further agreed that as and when proceeds with regard to sale of built up area were collected, proportionate amount would be credited to assessee s account. Subsequently on 25.3.1996, on Udhav H. Buxani staking his claim, four party agreement was entered into i.e., between assessee, Udhav H. Buxani, M/s Town and Country Developers Private Limited represented by Udhav H. Buxani and L & T. By way of four party agreement, security deposit to assessee and Sri Udhav H. Buxani was decided to be Rs.2.50 crores each, out of which Rs.1.25 crores was refundable. It is also not in dispute that assessee had authorized L & T (developer) to market all built up area of South City 12 project and he did not intend to retain any portion thereof for himself. 8. income arising from 34 acres which was subject matter of joint development agreement has been shown under head income from business in assessment year after assessment year. However income earned out of rest of 1 acre 6 guntas of land had not been shown at all by assessee in any of assessment years. According to assessee, there is no need to show such income as it was non-taxable capital asset. Admittedly, 1 acre 6 guntas of land was kept by assessee for his personal use. During course of search as mentioned supra, documents were seized, which depicted that assessee had also received income from L & T by entering into joint development agreement in respect of 1 acre 6 guntas of land also by surrendering FAR. relevant portions of seized documents containing aforementioned particulars are reproduced in order 13 passed by Appellate Commissioner as well as in order of Assessing Officer. 9. We have carefully perused relevant portions as depicted in orders passed by Appellate Tribunal, Appellate Commissioner and Assessing Officer. On plain reading of contents of such documents, it is clear that details are found relating to consolidated statements of amount to be paid to assessee towards joint development agreement. seized documents clearly show that assessee has entered into joint development agreement with L & T in respect of his personally owned asset of 1 acre 6 guntas of land also. said fact becomes crystal clear from letter dated 23.12.1999 addressed to appellant by L & T, which reads thus: LTCG/BLORE/PDBU/HSC/1797 September 23, 1999 14 Mr. Dinesh Ranka Ranka Group Ranka Chambers 31, Cunningham Road Bangalore-560052 Phone: 2260426/2262351 Dear Mr. Ranka, Sub: FAR area accrued on account of 1 acre 6 guntas in South City project Bangalore bearing Survey Nos.90/1, 91, 92, 93, 94, 95 & 96/1 part. It is noticed from Joint Development Agreement dated 19th October 1995 that only 34 acres have to be developed. However, available approved FAR area is for 35 acres 6 guntas. FAR accrued on account of 34 acres only, in South City project, is to be shared amongst M/s. Larsen & Toubro Limited, M/s. Dinesh Ranka & Associates and M/s. Buxani, as per ratios defined in supplemental agreement dated 22nd July 1999. FAR area accrued on balance area of 1 acre 6 guntas will be shared between M/s. Larsen & Toubro Limited and M/s. Dinesh Ranka & Associates, as per ratios defined in Joint Development Agreement dated 19th October 1995. 15 Thanking you, Yours faithfully, For Larsen s & Tourbro Limited Sd/- (H.S.Chandrashekar) General Manager Property Development Business Unit. (Emphasis Supplied) 10. From aforementioned letter, it is clear that there was joint development agreement dated 19.10.1995 governing development of 1 acre 6 guntas of land also owned by assessee and accounts of above have been made in pages 46 and 64 of seizure memo No.A/DDR-1/5 respectively by L & T and assessee separately under head 1.6 Accounts . said letter and other documents seized also prove that there was transfer of right (FAR) in favour of L & T in respect of 1 acre 6 guntas of land for development. What has been transferred in favour of L & T by assessee is FAR to extent of 7575.37 square meters in respect of 16 land measuring 1 acre 6 guntas held by assessee, though same was not subject matter of joint development agreement entered into on 19.10.1995. 11. As aforementioned, by way of amended plan approved during previous year relevant to assessment year 1999-00, assessee was eligible for FAR of 8589.53 square meters. records make it clear that assessee as per plan decided to retain FAR only to exent of 1014.16 square meters for his residence and surrendered balance of 7575.37 square meters in favour of developer (L & T) for construction of flats. Therefore there is transfer within meaning of Section 2(47) of Act since assessee has surrendered FAR of 7575.37 square meters. word, transfer as defined under Section 2(47) of Act in relation to capital asset includes sale, exchange or relinquishment of asset or extinguishment of any rights therein. In matter on hand, assessee has relinquished his rights over 17 FAR to extent of 7575.37 square meters and consequently his right in FAR relating to his plot of 1 acre 6 guntas of land to said extent gets extinguished. Thus it is clear case of transfer within definition as found in Section 2(47) of Act. seized material also discloses that L & T has paid Rs.3.15 crores towards such surrender of FAR and same would amount to sale proceeds. 12. transfer is complete on day when plan was sanctioned and building of apartment complex started since there is no way of assessee either getting back FAR or using same. Even if such situation arises, it would be another transfer on that day with L & T as transferor. argument of assessee that said amount of Rs.3.15 crores is to be adjusted out of proceeds of built up area relatable to FAR of 1 acre 6 guntas which according to them could be constructed in end, cannot be accepted. Such 18 adjustment though presumed in favour of assessee, does not change taxability of capital gains since same is taxable in year of transfer during assessment year 1999-2000. 13. Section 2(47) begins definition of transfer with words in relation to capital asset . Under Section 2(47) of Act, term transfer in relation to capital asset has been defined to include sale, exchange or relinquishment of asset. `capital asset means property of any kind held by assessee whether or not connected with his business or profession but does not include what is defined under sub-clause(i) and (ii) of Section 2(14) namely definition clause of capital asset. right to construct additional stories on account of increase in available floor space index (FSI) is capital asset and assignment of same is capital receipt. However, where no consideration is paid and such right is not embedded in land, it would not be liable to tax as capital 19 gains. In instant case as already noticed by us hereinabove assessee was eligible for FAR of 8589.53 Sq. Mtrs. However as per approved plan assessee retained FAR only to extent of 1014.16 Sq. Mtrs. for his residence and surrendered balance of 7575.37 Sq. Mtrs. in favour of Developer (L & T) for construction of flats by receiving consideration of `3.15 Crores. Thus, transaction in question would squarely fall within definition of `transfer as defined under section 2(47) of Act inasmuch as words employed in sub-clause(1) is sale , exchange , or relinquishment and under sub- clause(2) words employed is extinguishment of any rights therein . said definition is inclusive definition. expression must be read widely and not narrowly. It denotes extension and cannot be treated as restricted. transaction whereunder right to exclusive possession and enjoyment stood transferred, even subject to right of reversion in favour of transferor would be covered by 20 this section. In that view of matter, we are of considered view that transaction in question namely transfer of capital asset i.e., extent of 7575.35 Sq. Mtrs. of total extent of FAR which related to 1.6 acres of land retained by assessee to developer (L and T) would stand fully covered by definition clause of section 2(47) of Act. 14. search as aforementioned came to be conducted on 4.2.2004 wherein number of vital documents were found against assessee and L & T. Even thereafter letter dated 7.6.2005 as mentioned supra came to be written to assessee (wherein they have enclosed letter dated 23.9.1999) confirming terms on which amount in respect of FAR surrendered to be paid. It is clearly mentioned in said letter that available approved FAR area is for 35 acres 6 guntas though joint development agreement dated 19.10.1995 was only in 21 respect of 34 acres of land. It is also mentioned in said letter that FAR area accrued on balance area of 1 acre 6 guntas will be shared between L & T and assessee as per ratio defined in joint development agreement dated 19.10.1995, which clearly means that assessee is entitled to 25% of profit earned by utilizing 7575.37 square meters of FAR relatable to 1 acre 6 guntas of land. However, curiously another letter came to be issued by L & T on 4.7.2005 mentioning that amount of Rs.3.15 crores paid to assessee is in nature of advance. Such letter is clearly after thought inasmuch as, search was made in year 2004 and this self-serving letter written by L & T to protect assessee from tax liability by any stretch of imagination cannot be said to be reliable. Thus, explanation of L & T deserves to be rejected as same is after thought. 15. Having regard to totality of facts and circumstances of case, we concur with opinion 22 expressed by Assessing Officer and Appellate Commissioner that assessee has surrendered FAR to extent of 7575.37 square meters in respect of 1 acre 6 guntas exclusively held by him in favour of L & T and has earned Rs.3.15 crores as advance in that regard. We have already clarified supra that surrendering of said FAR by assessee in favour of L & T amounts to transfer within definition of Section 2(47) of Act. All these aspects are considered in detail by Appellate Commissioner as well as Assessing Officer. Income Tax Appellate Tribunal is not justified in concluding that there is no transfer of FAR relating to 1 acre 6 guntas during relevant year. Appellate Tribunal is also not justified in holding that no income has accrued during year as no construction has taken place relating to such FAR. reasons assigned by Income Tax Appellate Tribunal while setting aside orders passed by 23 Assessing Officer and Appellate Commissioner cannot be accepted in view of reasons mentioned supra. Accordingly, appeal is allowed. substantial question of law is answered accordingly in favour of Revenue. order passed by Income Tax Appellate Tribunal, Bangalore Bench , Bangalore in ITA No.1163/Bang/07 (Assessment year 1999-2000) stands set aside. Consequently, orders passed by Appellate Commissioner and Assessing Officer stand restored. Sd/- JUDGE Sd/- JUDGE Gss/- Commissioner of Income-tax Central Circle / Assistant Commissioner of Income-tax Central Circle-2(3) v. Sri Dinesh D. Ranka