HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 24 / 2013 C I T Central Jaipur ----Appellant Versus M/S Unique Builders And Developers Jpr ----Respondent D.B. Income Tax Appeal No. 28 / 2013 C I T Central Jaipur ----Appellant Versus M/S Unique Builders And Developers Jpr ----Respondent For Appellant(s) : Mr. Anil Mehta with Mr. Sameer Sharma For Respondent(s) : Mr. Sanjay Jhanwar with Mr. Prakhul Khurana & Ms. Archana HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 19/05/2017 In both these appeals common questions of law and facts are involved, hence, they are decided by this common judgment. 1. By way of these appeals, department has assailed judgment and order of Tribunal whereby Tribunal has (2 of 10) dismissed appeals of department and partly allowed appeals of assessee. 2. This Court while admitting appeals framed following substantial questions of law:- 1. Whether Tribunal was justified in holding that Assessing Officer as well as CIT(A) have erred in rejecting books of accounts of assessee under Section 145(3) of Act and thereby reversing findings given by Assessing Officer as well as CIT(A), ignoring undisputed facts that assessee has failed to maintain quantitative and qualitative stock registers and vouch expenses incurred by it and on money received by it has not been disclosed? 2. Whether Tribunal was justified in rejecting application of percentage completion method adopted by AO, when this rejection means acceptance of loss returns of assessee engaged in construction and sale of residential/commercial projects in contravention of Accounting Standard-7 and Accounting Standard-9 issued by ICAT? 3. Whether Tribunal was justified in ignoring fact that two brothers who are partners either themselves or through their sons and their families and actively engaged jointly in business of sister concerns of assessee firm and thus acceptance of on money and specific seized documents cannot be ignored for intervention? 4. Whether Tribunal was justified in deleting addition of Rs. 29.95 crore confirmed by CIT(A) , Jaipur ignoring that assessee transferred all its rights, control and interest in first parcel of land (measuring 114.985 acres) in garb of Security deposit through Development Assessment dated 25.3.2008? 3. Four questions were framed by Court. However, question no. 1,2 & 3 are governed by decision which has been taken today in Tax Appeal No. 23/2013 (CIT Central Jaipur vs. M/s Unique Builders and Developers Jaipur) in case of present respondent assessee. (3 of 10) 4. However, issue No. 4 raised in these appeals was not raised in earlier appeals. Therefore, issue no. 4 only is required to be answered. 5. Counsel for appellant contended that in view of Development Agreement which is on record produced along with paper book being Annexure-7 entered between parties clearly established that parties are agreed to development of land and transfer of builder. 6. In that view of matter, land has been ransferred in name of assessee. 7. In view of above, AO and CIT(A) has not committed any error. issue is required to be answered in favour of department. However, in view of observations which are made by Tribunal in para 30 & 31 which reads as under:- 30.1 On other hand, ld. AR submitted that assessee was constituted for performance of group housing project during month of Dec. 2006. assessee purchased first parcel of land admeasuring 11.85 acres during month of Dec. 2006.The assessee firm applied to JDA for change of land i.e. conversion. After change of land use on 28th May, 2007, single patta was issued to assessee firm by JDA on 59 14-06-2007. He submitted that firm acquired second parcel of land admeasuring 17.889 acres during month of Nov. 2007 to Jan. Feb/2008. assessee conceivd Mega Housing Project on above residential plot of land and started marketing and selling same. construction of residential units under project commenced in month of Sept. 2007. Since size of project was quite laree, assessee decided to avail of marketing and selling services of Asipac and appointed it vide service agreement dated 24-08-2007. Since it was necessary to infuse more funding into project, it was advised by consultant Asipac to obtain substantial loans/ funds or outsource development and marketing of project and go for private equity funding. assessee decided second option to outsource (4 of 10) development as well as marketing of project. Therefore, assessee on 8-02-2008 entered into 06 agreements as part of arrangements of funds through FDI / private equity funding as under:- (i) Shareholders Agreement (ii) Shares Subscription Agreement (iii) Brand Name & Licensing Agreement (iv) Development Agreement (registered on 25-03-2008) (v) Project Management Agreement (vi) Supplemental Agreement to Shares Subscription Agreement/ Shareholders Agreement 30.2. ld. AR submitted that on 25-03-2008, Tripartite Development Agreement was executed on 8- 2-2008 between assessee, UAHPL and RIL, Mauritius and was registered. He submitted that under said agreement dated 25-03-2008 assessee continued to be land owner, though development of project was taken over and required 60 to be carried out by UAHPL. He submitted that said development agreement could not be considered as sale deed because at time of registration stamp duty paid is 1% and on other hand on sale deed, stamp duty payable is @ 11% ld. AR at time of hearing also filed Schedule of Rajasthan Stamp Act, 1998 to substantiate his above submission. He further submitted that said development agreement was registered as agreement as per Article 5 (bbbb)and whereas stamp duty payable on conveyance deed on immovable property is as per Article 21(1). He further submitted that as per said development agreement assessee was to receive security deposit of Rs. 105.85 crores in respect of entire land in order to secure and ensure payent of consideration referable to land from UAHPL. He submitted that as per provision of transaction documents there were in fact two independent contracts between parties viz. Ist in respect of first trench land and second in respect of second trench land and amount referable to each trench was mentioned separately in transaction document and sum referable to each trench was agreed to be invested in UAHPL by RIL, Mauritius. He submitted that in proportion, amount of Rs. 22.54 crores was released by RIL, Mauritius in favour of UAHPL towards first trench which is termed as on first closing on 2-4-2008. assessee received amount of Rs. 39,55,95,900/-as security deposit out of total amount payable amounting to Rs. 105.85 crores. ld. AR submitted that as on 7-5-2008, Govt. of Rajasthan u/s 4(1) of Land Acquisition Act, issued Notification for acquisition of land and as result, project suffered set back. Therefore, Supplemental Agreement was entered into on 11-6- 2008 whereby Warburg Pincus Group restricted its (5 of 10) investment to Rs. 22.54 crores only which was already paid and option was also given to go ahead with project in case notification is withdrawn and other acquisition conditions are satisfied. Consequently, 61 payment of security deposit was also confined to initial amount paid at time of first closing only and no contract took place between parties in respect of second trenche land. ld. AR submitted that on 29-09-208, Govt.of Rajasthan issued notification releasing project land from acquisition. However, Warburg Pincus Group did not exercise its option and project got confined to first trenche land measuring 11.958 acres. He submitted that security to be paid by assessee of Rs. 105.85 crores aginst entire project got restricted to Rs. 41.94 crores out of which assessee received only Rs. 39.55 crores as security deposit. ld. AR submitted that AO did not take into account this Supplemental Agreement dated 11-06-2008 considering it as bogus document as it was neither registered nor notorized and therefore, considered security deposit payable under development agreement dated 25-03-2008 of Rs. 105.85 crores as business receipts. 30.3 ld. AR submitted that AO erroneously considered that provision of Section 53A of Transfer of Properties Act is applicable. He submitted that such land is stock in trade and not capital assets. Therefore, provision of Section 53A of Transfer of Properties Act cannot be extended to stock in trade as Section 2(47) of I.T. Act is artificially extended to definition of capital assets only. He further referred to provision of Section 54 of Transfer of Property Act, 1882 and submitted that land being immovable property and sale is governed by Transfer of Property Act. Section 54 of said Act defines sale as under:- Sale is transfer of ownership in exchange for price paid or promised or part-paid and part- promised. He further submitted that it further defines how sale is made and same is as under:- Sale how made: Such transfer, in case of tangible immovable property of value of one hundred rupees and upwards, or in case of reversion or other intangible thing, can be made only by registered instrument. In case of tangible immovable property of value less than one hundred rupees, such transfer may be made either by registered instrument or by delivery of property. ld. AR submitted that in view of above, since development agreement dated 25- 03-2008 is not (6 of 10) registered as conveyance deed between assessee and developer for impugned land, there is no sale under Transfer of Property Act. That it is development agreement simplicitor for development of land and nothing more. Hence, said amount received by assessee as per development agreement is not sale consideration. 30.4 ld. AR further referred to clause 5.1 of said development agreement and submitted that it stipulates clearly that if developer requires, assessee shall transfer project land alongwith transfer approval and project approval in favour of developer at price not exceeding Rs. 3.50 crores per acre. Therefore, this clause gives option to developer to buy land if it so desires. He submitted that if land had been sold to developer while signing development agreement there would not have been any need for such clause for giving option to developer to buy land. ld. AR referred to clause 5.3 of development agreement and submitted that transfer of project land could take place in favour of developer as contemplated vide clause 5 and will occur through deed of conveyance and same shall be executed on proper value of stamp paper and will be registered with office of Sub- Registrar. He submitted that as per clause 5.4 of agreement if owner i.e. assessee refuses to execute and / or cause registration of deed of conveyance or sale deed in favour of developer in accordance with clause 5 of agreement , developer shall without prejudice to its other rights and remedies shall have right to seek specific performance against owner to cause sale deed to be executed and to register in favour of developer. He submitted that as per clause 12.3 of developer agreement in event of breach of terms and conditions of agreement by assessee, at sole discretion of developer, developer shall sell or shall cause to sell project land to third party at prevailing market price and for consideration acceptable to developers and interested entities. ld. AR further referred to clause 12.3 of agreement and submitted that assessee would be bound to refund all proceeds to developers pursuant to sale of project land including but not limited to amount equivalent to security deposit. He submitted that in event of breach of contract, land has to be sold by assessee and not by developer as land is owned by assessee only. ld. AR further submitted that AO misunderstood development agreement because as per buyer s agreement, copies of which were also filed before authorities below as well as placed in paper book filed before us, it provides that sale of flat has to be executed by owner and developer jointly. He submitted that until, unit is sold, (7 of 10) assessee i.e. owner of land shall remain owner of land and developer shall remain owner of development of land. He submitted that said development agreement is only to develop land and not to buy land. He submitted that security deposit has wrongly been considered by authorities below as sale consideration but same is to protect assessee's interest during period and on completion of project to realize sale proceeds adjust against security deposit and balance to be paid to owner. He submitted that security deposit received by assessee from developer was liability and same was shown in books of accounts of assessee and not consideration for sale of land. He submitted that clause 6.6 of agreement read with clause 12.3 thereof require assessee to refund/ repay security deposit to developer by way of sale proceeds of land to be sold by assessee with developer permission. He submitted that irrevocable and exclusive license and permission to use project land was given by assessee to developer for use of project land for development purposes and had assessee not given such permission to developer, very purpose of development would have been defeated. He submitted that reliance placed by AO on clause 4.6 of agreement is misplaced as it has to be read alongwith other clauses like clauses 5, 6,7, and 12 of development agreement. He further submitted that assessee need not to object to sale consideration of units because assessee's interest is duly secured by virtue of clauses 7.1.1, 7.1.2 and 7.2 of development agreement which provides that assessee will be provided fixed amount of Rs. 105.85 crores out of receivable on sale of residential units. ld. AR submitted that AO himself was confused as he also made attempt to apply provision of Section 28(va) of Act which has no application as Section 28(va) applies only in cases where lumpsum consideration is paid by party to another to abstain from carrying out business activity similar to business carried on by first party. He submitted that it normally happens when business is sold and buyer in order to secure commercial cause asks sellers not to compete or carry on similar business within vicinity. ld. AR submitted that cases cited by ld. DR are not applicable to facts of case as land has not been sold under development agreement. Therefore, even addition of Rs. 29.95 crores confirmed by ld. CIT(A) by deleting balance amount of Rs. 52.74 crores out of total addition of Rs. 82.69 crores made by AO is not justified. He submitted that not only ground of appeal taken by Department be rejected, ground no.4 of appeal taken by assessee may be allowed by deleting addition sustained by ld. CIT(A) (8 of 10) 31.1 We have carefully considered submissions of ld. representatives of parties, orders of authorities below and have also considered cases cited before us by authorities below as well as ld. representatives of parties. We have also gone through carefully relevant clauses of development agreement as well as Supplemental Agreement. We observe that under said development agreement dated 25-03-2008, assessee has permitted developer not only to develop land and complete project, but also to sell same to which assessee would also be party to sale. At time of execution of said development agreement, assessee was to receive sum of Rs. 105.85 crores but assessee received Rs. 39,55,95,900/- as security deposit. It is fact that due to initiation of acquisition proceedings by State Govt. of Rajasthan, in respect of land on which project My Haveli is to come up became subject to acquisition under Land Acquisition Act. Subsequently Govt. of Rajastan released project land from acquisition on 29- 09-2008 but in meanwhile RIL, Mauritius restricted its investment to Rs. 22.50 crores which was already paid and thereafter no further investment came from Rosewood Investment ltd, Mauritius. Therefore, project got confined to first trench land admeasuring 11.985 acres instead of entire project land admeasuring 29.847 acres. We observe that AO by considering said development agreement as agreement to sale of land and also considered entire amount of security deposit to be received by assessee of Rs. 105.85 crores as sale consideration ignoring fact that entire project execution did not materialize. AO accordingly made addition of Rs. 82,69,66,103/- as business profit from sale of project land. On perusal of document on record and considering submissions of ld. representatives of parties, it is fact that AO has taken contrary stand in case of assessee before us. He has doubted genuineness of Supplemental Agreement dated 11-06-2008 in case of assessee herein but in hands of UAHPL he considered Supplemental Agreement dated 11-06-2008 as genuine and thereby treated consideration for land payable by UAHPL to assessee at Rs. 41,94,75,000/-. We observe that ld. CIT(A) after considering Supplemental Agreement dated 11-06- 2008 has taken sale consideration in respect of first parcel of land in para 14.3 of impugned order and after deducting cost as per assessee record of Rs. 11.99 crores has considered profit at Rs. 29.95 crores . Hence this Supplementary Agreement dated 11-06- 2008 could not be ignored and is genuine document on peculiar facts of case. Therefore, Department as well as assessee have filed appeal against impugned order of ld. CIT(A). (9 of 10) 31.2 On perusal of relevant clauses of development agreement, though fixed amount as security is receivable / received by assessee as owner of land but we are of considered view that under agreement transfer of land has not taken place nor security deposit received by assessee could be considered as sale proceeds. said agreement according to us cannot be considered as agreement to sell in view of specific provision of Stamp Act. It is not in dispute that development agreement is registered and stamp duty has been paid as memorandum of agreement under Article 5 (bbbb)and not stamped as deed of conveyance as per Article 21(i) of Rajasthan Stamp Act. On perusal of relevant clauses of Development Agreement, we are of considered view that this agreement is entered into only for purpose of protecting respective rights of parties and to ensure smooth development of project and thereafter to sell to prospective buyers of developed project. We agree with ld. AR that provision of Section 53A of Transfer of Property Act cannot be made applicable to land under consideration as undisputedly said land is stock in trade of assessee and not capital asset. . We observe that authorities below have considered said development agreement which amount to transfer of land particularly in view of clause 4.1 thereof as it gives irrevocable and exclusive license and permission to use project land to developer. But we are of considered view that said permission has been given to developer for limited purpose of development of project and not with intention to transfer of land. above facts are fortified in light of clause 5 of development agreement which gives option to developer to purchase land if they want @ Rs. 3.50 crores per acre. It is also fact that assessee received security deposit of amount of Rs. 39,55,95,900/- and not proportionate amount of Rs. 41,94,75,000/- which was not disputed by ld. DR at time of hearing. assessee has not received any additional amount over and above amount as mentioned in orders of authorities below. We agree that security deposit received by assessee and shown as liability is in order and same cannot be considered as sale consideration for transfer of land. 31.3 We also agree with ld. AR that provision of Section 28(va) of Act are not applicable to case before us as it applies only when lumpsum consideration is paid by party to another to abstain from carrying out business activity similar to business carried on by first party. We agree with ld. AR that this is not case here. 31.4 Before, we part with this ground, we may state that case cited before us are not relevant and do not consider it necessary to discuss superficially in (10 of 10) view of our our findings. 31.5 In view of above, we are of considered view that said security deposit received by assessee cannot be considered as sale consideration for transfer of land in assessment year under consideration. Hence, we not only confirm order of ld. CIT(A) in deleting sum of Rs. 52.74 crores by disallowing ground no. 3 of appeal taken by Department but also delete balance addition of Rs. 29.95 crores sustained by ld. CIT(A) by allowing Ground No. 4 of appeal taken by assessee. Accordingly, Ground No. 3 of appeal of Department is rejected and Ground No. 4 of appeal of assessee is allowed. 8. Counsel for respondent contended that contradictory stand is taken in earlier three issues and in view of observations made by Tribunal, issue is required to be answered in favour of assessee. 9. We are in complete agreement that under Development Agreement rights will not be transferred and on specific question which has been put to counsel for department that transfer will not be made to signatory and owner of developer, view taken by Tribunal is correct. issue is also required to be answered in favour of assessee against department. 10. appeals stand dismissed. copy of judgment be placed in each file. (INDERJEET SINGH),J. (K.S. JHAVERI),J. A.Sharma/27 & 30 CIT Central, Jaipur v. Unique Builders And Developer