BOMBAY FOOTWEAR PVT. LTD, MUMBAI V. THE PR. CIT -14, , MUMBAI

ITA 1645/MUM/2021

AI Insights

The case involves Bombay Footwear Private Limited, which entered into a development agreement with Godrej Properties Limited for the development of land held as a capital asset. The income from this development was initially accepted as capital gains in the assessment years 2013-14 and 2014-15. However, for the assessment year 2015-16, the Principal Commissioner of Income Tax invoked section 263, changing the character of income from capital gains to business income, citing lack of adequate enquiry by the Assessing Officer. The Tribunal examined whether the PCIT was justified in revising the assessment order under section 263, considering the precedents and the specifics of the development agreement.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 132069 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-02-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 19-09-2021
• Other Referred Cases: Gabriel India Limited vs. CIT, CIT vs. Ballarpur Industries Limited, Jeevan Investment & Finance (P.) Ltd. vs. CIT, Sify Software Limited vs. ACIT, Malabar Industries Co. Ltd. vs. CIT, JRD Tata Trust vs. DCIT, Distributors Baroda (P) Ltd. vs. Union of India, Radhasoami Satsang vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Revision of order; Rule of consistency; Wrong claim; Capital expenditure; Set aside; Capital Gains
• Section: 263; 142(1); 43; 2(A); 13

Judgement Text

vk;dj vihyh; vf/kdj.k eqacbZ ihB ßchÞ eaqcbZ Jh fodkl voLFkh] U;kf;d lnL;],oa Jh vejthr flag] ys[kkdkj lnL; ds le{k IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B” BENCH BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI AMARJIT SINGH, ACCOUNTANT MEMBER vk-vk-la- 1645@eaqcbZ@2021 ¼fu-oa- 2015&16½ ITA No.1645/MUM/2021 (A.Y.2015-16) Bombay Footwear Private Limited Deonar Village, Behind Telecom Factory, Deonar, Mumbai-400 088 PAN No. AAACB2162P ..... vihykFkhZ/Appellant cuke Vs. Principal Commissioner of Income Tax-14 Aayakar Bhavan, M. K. Road, Mumbai-400 020 ..... izfroknh/Respondent vihykFkhZ }kjk@Appellant by : Ms. Aarti Vissanji & Shri Ajit Shah, Advocates izfroknh }kjk@Respondent by : Dr. Mahesh Akhade, CIT-DR & Ms. Vranda U. Matkari, Sr. AR lquokbZ dh frfFk@Date of hearing : 17/02/2023 ?kks”k.kk dh frfFk@Date of pronouncement : 15/05/2023 vkns’k/ ORDER PER VIKAS AWASTHY, JM: This appeal by the Assessee is directed against the order of Principal Commissioner of Income Tax-14, Mumbai (hereinafter referred to as “the PCIT”) dated 23.03.2020, passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2015-16. P a g e | 2 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. 2. Ms. Aarti Vissanji appearing on behalf of the assessee submitted that the assessee had entered into an agreement with Godrej Properties Limited (GPL) in September, 2010 for development of non-agricultural freehold land admiring 5442.1 sq. meters at village Deonar. The land was owned by the assessee and was held as capital asset. As per the agreement, towards the consideration of land, the assessee would receive 50% share in the sales revenue of the flats constructed on the said land. The assessee received part consideration from sale of land for the first time in the period relevant to assessment year 2013-14. The assessee offered income from sale of land under the head “Capital Gains”. The Assessing Officer (AO) after due enquiry accepted the income returned by the assessee under the head “Capital Gains”. Similarly, in the assessment year 2014-15, the income offered by the assessee from sale of land under the head “Capital Gains” was accepted by the AO. In the impugned assessment year, the assessment was selected for limited scrutiny to examine: Whether the capital gains/land is genuine and has been correctly shown in the return of income? The AO issued notice u/s 142(1) of the Act (at page 1 of the Paper Book-II). The assessee gave a detailed reply to the said notice. A copy of the reply dated 01.11.2017 is at page 28 of the Paper Book-I. The AO completed the assessment vide order dated 27.12.2017 accepting income declared by the assessee. The PCIT issued show cause notice dated 09.03.2020 u/s 263 of the Act. The PCIT invoked Explanation 2(a) of section 263 of the Act to contend that the AO has failed to make enquiries and verifications that should have been made before passing the assessment order. The PCIT further changed the character of income from sale of land as “Business Income” as against “Capital Gains” offered by the assessee. 3. The ld. Counsel for the assessee referred to the Development Agreement dated 21.09.2010 at page 31 to 67 of the Paper Book-I. She pointed that the status P a g e | 3 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. of assessee in said agreement is that of the owner of the land. Whereas, the Godrej Properties Limited is the Developer. The assessee is not a co-developer of the land. A perusal of the said agreement would clearly show that the assessee has no role in development of the housing project. The assessee has granted development rights in respect of land to the developer. In lieu of granting rights to develop land, the assessee is entitled to 50% share in the gross sales revenue generated from sale of total constructed area developed by Godrej Properties Limited, the developer. The ld. Counsel submitted that the assessee never converted land held as capital asset into stock in trade. The ld. Counsel further contended that the AO before passing the assessment order had made enquiries and after being satisfied with the reply of assessee, accepted the return of income. Moreover, this is the third year where the assessee has offered to tax income from sale of land received in accordance with the development agreement executed in September, 2010. In the preceding two assessment years, the income from sale of land, granting of development rights to Godrej Properties Limited was offered to tax in 2013-14 and 2014-15 on the same revenue sharing model. The same was accepted by the Revenue as capital gains after the enquiry. The assessment order for AY 2013-14 is at page 81 and assessment order for AY 2014-15 is at page 88 of the Paper Book-I. The Rule of consistency demands that once the income has been accepted under the head capital gains in the preceding assessment years, with no change in the facts the income arising from the same agreement should be accepted as capital gains. 4. The ld. Counsel further submitted that merely for the reason that the AO has not given a detailed findings for accepting the income of the assessee under the head capital gains would not mean that no enquiry has been conducted by the AO. In support of this argument, the ld. Counsel placed reliance on the decision in the P a g e | 4 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. case of Gabriel India Limited, 203 ITR 108 (Bombay). The ld. Counsel finally submitted that impugned order u/s 263 of the Act passed by the PCIT is liable to be quashed as the AO has made necessary enquiry in assessment proceedings. 5. Per contra, Dr. Mahesh Akhade representing the Department strongly supported the impugned order. The ld. Departmental Representative (DR) submitted that a perusal of the assessment order dated 27.12.2017 would show that it is a cryptic order and the AO has not applied his mind on an issue for which the case was selected under limited scrutiny. In respect of assessment order for AY 2013-14 and 2014-15, the ld. DR submitted that the assessment orders for preceding assessment years are also wrong as the AO in the preceding assessment years has not decided the issue in right perspective. He submitted that in any case each assessment year is independent assessment year and assessment for each assessment year has to be examined independently. The principle of res judicata does not apply in income tax proceedings. The AO has to investigate each assessment year and has to pass assessment order on the facts on each assessment year. In support of his submissions, the ld. DR placed reliance on the following decisions: 1. CIT vs. Ballarpur Industries Limited, 85 taxmann.com 10 (Bombay); 2. Jeevan Investment & Finance (P.) Ltd. vs. CIT, 88 taxmann.com 552 (Bombay); and 3. Sify Software Limited vs. ACIT, 80 taxmann.com 273 (Chennai-Trib.) The ld. DR submitted that the AO while completing the assessment has applied incorrect provisions of law following the earlier assessment orders. The AO without conducting independent enquiry in the impugned assessment year was carried away with the findings in the preceding assessment year, wrong presentation of P a g e | 5 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. facts and wrong claim made by the assessee. The development agreement dated 21.09.2010 is in fact a joint development agreement between the assessee and Godrej Properties Limited. This fact is evident from the profit sharing model. As soon as land is pooled in a project developed jointly, the capital asset becomes business asset. The land owned by the assessee on which a housing project is developed by Godrej Properties Limited is not an outright sale of land. The sale is that of development rights as per the agreement. This itself shows that the assessee is a co-developer and is sharing risk. The mode of compensation is profit sharing of revenue from complete household units constructed on the land. The revenue from sale includes value of land and development charges. Thus, the consideration received on sale of flats includes both the components. Thus, the ld. DR prayed for upholding the impugned order and dismissing appeal of the assessee. 6. Rebutting the submissions made on behalf of the Department, the ld. Counsel submitted that the case laws on which the ld. DR has placed reliance are distinguishable on facts and hence, have no relevance in deciding the controversy involved in present appeal. There is only one agreement dated 21.09.2010 on the basis on of which the assessee has received compensation on year on basis as and when the flats are sold. In the preceding assessment years, the Revenue has accepted compensation received by assessee on sale of land as capital gains. The ld. AR further asserted that a perusal of the development agreement at page 43 of the paper book would show that developer is solely responsible for development at its own cost and risk. She reiterated that the assessee has never converted the land held as capital asset into stock in trade. Insofar as mode of consideration is concerned, It has been mutually agreed between assessee and Godrej Properties Limited to share revenue generated from sale of flats. Hence, the assessee received its share of consideration as and when flats are sold. Insofar as the relation P a g e | 6 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. between the assessee and the developer, the ld. Counsel referred to Clause 28 of the agreement and submitted that the relation between the parties is strictly on principal to principal basis and it has been specifically mentioned that nothing contained in the agreement shall be construed as constituting a partnership between the parties or a joint venture between the parties. The owner of the land will not be liable for the tax, deals, matters and things entered into, executed or agreed to be done by the developer with third party. The ld. Counsel further placed reliance on the following decisions to support her submissions: 1. Malabar Industries Co. Ltd. vs. CIT, 243 ITR 83; 2. JRD Tata Trust vs. DCIT, 112 taxmann.com 275 (Mumbai Trib.) 7. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decisions and the documents on which the respective sides have placed reliance in support of their contentions. The assessee in appeal has assailed the action of PCIT in invoking the provisions of section 263 of the Act. The assessee in grounds of appeal has raised three grounds and sub ground (a) to (m) of ground no. 1. All the ground including sub grounds raised by the assessee are directed against the order of PCIT passed u/s 263 of the Act. The assessee has also raised additional grounds of appeal. The ld. Counsel for the assessee stated at Bar that she is not pressing additional grounds of appeal. Thus, in view of the statement made by ld. Counsel for the assessee, the additional grounds are dismissing as not pressed. 8. It is an undisputed fact that the assessment for AY 2015-16 was selected for limited scrutiny under CASS to examine: i) whether capital gains/loss is genuine and has been correctly shown in the return of income. P a g e | 7 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. ii) whether capital gains/loss on sale of property has been correctly shown in the return of income. The AO issued notice u/s 142(1) of the Act dated 22.09.2017 seeking explanation/submissions along with supporting documentary evidences in respect of issues for which the case of assessee was selected for limited scrutiny. The assessee gave a reply to the said notice on 01.11.2017. Thereafter, the AO completed assessment vide order dated 27.12.2017 accepting income returned by the assessee. A perusal of the assessment order shows that there is no discussion on the issues for which the case of assessee was selected for limited scrutiny. 9. It is also an undisputed fact that the assessee has offered income from sale of land pursuant to development agreement dated 18.09.2010 for the first time in AY 2013-14. A perusal of the assessment order dated 12.02.2016 for AY 2013-14 would show that the AO has examined the issue and thereafter, accepted the income offered by the assessee from land under the head capital gains. In the subsequent assessment year that is 2014-15, the assessee again offered income from land under the head capital gains and the same was again accepted by the AO. In the impugned assessment year once again, the AO has accepted income offered by the assessee from land as capital gains. As per the agreement between assessee and Godrej Properties Limited, for the sale of land the consideration is received by the assessee on revenue sharing model as and when the flats are sold. The sale proceeds of constructed part of building is shared in ratio of 50% each by the assessee (owner of the land) and the developer. 10. One of the contention raised by the Revenue is that the revenue sharing model indicates that the assessee is also bearing risk. Here it would be relevant to P a g e | 8 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. refer to some of the Clauses in the development agreement (supra). The extract of the relevant Clauses from the agreement are reproduced herein below: “3. SECURITY DEPOSIT 3.1 The Developer shall pay to the Owner an Interest Free Refundable Security Deposit for an amount of Rs.10,00,00,000/- (Rupees Ten Crores only) (hereinafter referred to as "the Deposit) for the due observance and performance of the obligations undertaken by the Developer in respect of the transaction/ arrangement of development of the said property in the following manner :- (i) A sum of Rs.2,00,00,000/- (Rupees Two Crores only) has been paid by the Developer to the Owner on or before the execution hereof (the payment and receipt whereof the Owner doth hereby admit and acknowledge and acquit release and discharge the Developer from the same) and (ii) The balance sum of Rs.8,00,00,000/- (Rupees Eight Crores only) ("Balance Deposit") shall be paid by the Developer to the Owner on obtaining the Commencement Certificate set out in clause 6.2 below. xxxxxxxxxx xxxxxxxxxxx . 11. DEVELOPER'S UNDERTAKING The Developer hereby covenants, agrees and undertakes with the Owner that: (i) The Developer shall upon execution hereof, initiate the process of applying for and obtaining all necessary permissions/approvals from the concerned authorities for commencing the construction of the proposed buildings on the said property; (ii) The Developer shall during the subsistence of this Agreement be entitled to enter into separate contracts in its own name with suppliers of materials, building contractors, architects, engineers and other for carrying out the development of the said property, at its own'risk and cost. xxxxxxxxxxx xxxxxxxxxxx 14. DEVELOPMENT AND SALE 14.1 The Developer shall carry out in its sole and unfettered discretion, and at its own costs, charges and expenses in all respects, all or any items of works for development of the said property, which includes construction of internal roads, P a g e | 9 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. laying out of compulsory open spaces or recreation grounds, laying of drainage, sewage and water pipes, and electricity and telephone cables, electric sub- station, common walls, gas pipelines, and other service and utility connections and other items, in conformity with terms and conditions as may be imposed by the MCGM and other statutory authorities while sanctioning the plans and also such other items and works may be required to be carried out for the purpose of making the said property fit for constructor of residential building(s) thereon as per this Agreement. All finances for completion of the said items of works shall be provided, borne and paid by the Developer alone, and the Owner shall not be liable to incur any financial obligations in that behalf. The Owner (if so required) shall, however, render all assistance and co-operation that may be required by the Developer from time to time to carry out the development work in respect of the said property and construction and completion of the said Project thereon, including signing and executing all necessary documents and writings. xxxxxxxxxxx xxxxxxxxxxx 23. DELAY AND DAMAGES: 23.1 In the event of the Project Completion is not achieved by the Developer within the period as set out in clause 23.1 hereinabove, the Developer shall be liable to pay to the Owner, liquidated damages, calculated at the rate of Rs.4,00,000/- (Rupees Four Lakhs only) per month of delay beyond the stipulated period (including the grace period) in clause 23.1 herein above. 23.2 The Developer shall alone be responsible for the following losses or claims that may arise to the Project. xxxxxxxxxxxx xxxxxxxxxxxx 25. OWNERSHIP OF THE PROPERTY The possession of the said property is and shall always continue to be with the Owner until the time possession of the completed residential units in the proposed building/s shall be handed over by the Developer to the respective purchasers of such residential units. The authority and permission to be granted by the Owner to the Developer to commence construction of the proposed residential building/s shall not be construed to be handing over or giving possession of the property to the Developer. xxxxxxxxxxxxx xxxxxxxxxxxxx P a g e | 10 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. 28. RELATIONSHIP BETWEEN THE PARTIES Nothing contained herein shall be construed as or be deemed to Developer as constitute the an agent of the Owner, and the relationship between the parties hereto is strictly on a principal to principal basis, and nothing contained herein shall be construed as constituting any partnership between the parties hereto or a joint venture or an association of persons between the parties hereto, and the Owner will not be liable for the acts, deeds, matters and things entered into, executed or agreed to be done by the Developer with any other parties and authorities.” From perusal of above covenants of the Development Agreement, it is unambiguously clear that the risk and the cost of development of the housing project is that of the developer and of not the assessee. Although, the assessee is compensated by way of profit sharing model but the financial interest of the assessee is fairly secured by way of advance deposit of Rs.10 crores, which of course would be adjusted gradually on the sale of complete residential units (Re. Clause 16 Distribution Mechanism). The assessee is not liable for any damages on account of delay or losses in the project. The entire risk and liability to bear the damages is that of the developer. Possession and the ownership of the land shall continue to be with the assessee/owner till the time possession of the completed residential units is handed over to the respective buyers of the flats. The relationship between the developer and the assessee is strictly on principal to principal basis. Thus, from the above covenants in the development agreement it can be safely deduced that it is not a case of joint development agreement as argued by ld. DR. 11. The contention of the Revenue is that the AO has failed to conduct enquiries before completing the assessment. A perusal of documents on record reveal that the assessment order was selected for limited scrutiny to examine the genuineness of the capital gains, the AO has conducted primary enquires. The agreement on the basis of which the assessee has offered income from land is the same which was P a g e | 11 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. subject matter of scrutiny in AYs 2013-14 and 2014-15. For AY 2013-14 after enquiries, the AO accepted the income from land as capital gains. In subsequent assessment year, the AO again accepted the income that germinated from same development agreement as capital gains. No material is brought on record to show that the assessment for AY 2013-14 and 2014-15 were distributed. Therefore, it can be presumed that they have attained finality. The impugned assessment year is a third assessment year. Since, the agreement consequent to which the income was offered to tax as capital gains was the same, there could have been no deviation in the nature of income. We are live to the fact that the principle of res judicata do not apply in income tax proceedings, nevertheless, where there is no change in the facts and circumstances from the preceding assessment year, the Rule of Consistency cannot be ignored (Re. Distributors Baroda (P) Ltd. vs. Union of India, 155 ITR 120 (SC) and Radhasoami Satsang vs. CIT, 193 ITR 321 (SC)) 12. The Revenue has raised another objection that there is no discussion in the assessment order with respect to genuineness of the capital gains for which the case of assessee was selected for limited scrutiny. Undisputedly, in the assessment order, there is no discussion with respect to the capital gains on sale of land. However, from the documents on record it is evident that the AO has issued notice u/s 142(1) of the Act for making enquiry. The assessee has responded to the notice giving the details of the transactions. The AO thereafter has not made any further investigation in issue and was ostensibly satisfied with the reply. Merely for the reason that the AO has not discussed about the issue in the assessment order would not make the assessment order erroneous. In the case of CIT vs. Gabriel India Limited (supra) wherein, under similar set of facts where the AO made no detailed discussion in the assessment order on an issue but had made enquiries regarding the nature of expenditure and had accepted the explanation furnished by the P a g e | 12 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. assessee, passed the assessment order without even referring to the issue, the CIT invoked revisional jurisdiction u/s 263 of the Act on the ground observing that the order of AO did not contain discussion on allowability of the claim in the assessment order. The Hon’ble High Court held: “14. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter that, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interests of the revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.” In the instant case, the PCIT has directed to reframe assessment after re-examining the same Development Agreement from the perspective of PCIT. Merely for the reason that the AO has not deliberated in the assessment order on the issues for which the case of assessee was selected for limited scrutiny and the view taken by the AO is one of the possible view with which PCIT does not agree, cannot be a reason for revision. 13. The jurisdiction u/s 263 of the Act can be invoked by the CIT/PCIT where any order passed under the Act by the AO is erroneous and is prejudicial to the interest of revenue. The sine qua non for exercising revisional jurisdiction u/s 263 of the Act P a g e | 13 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. is, the order of AO should be erroneous and prejudicial to the interest of revenue. Both the conditions have to be satisfied simultaneously. In the instant case, the Revenue has failed to show that the assessment order is erroneous. Both the conditions for exercising revisional jurisdiction u/s 263 of the Act are not satisfied in the instant case. Thus, we find merit in the appeal of the assessee. 14. In the result, impugned order is quashed and appeal of the assessee is allowed. Order pronounced in the open court on Monday the 15 th day of May 2023. Sd/- Sd/- (AMARJIT SINGH) (VIKAS AWASTHY) Yks[kkdkj lnL;/ACCOUNTANT MEMBER U;kf;d lnL;/JUDICIAL MEMBER eaqcbZ/Mumbai, fnukad/Dated: 15/05/2023 Mahesh R. Sonavane izfrfyih vxzsf”kr of the Order forwarded to: 1. vihykFkh/The Appellant , 2. izfroknh/The Respondent. 3. vk;dj vk;qDr/ CIT 4. foHkkxh; izfrfu/kh] vk;- vih- vf/k-] eqacbZ/DR, ITAT, Mumbai 5. xkMZ QkbZy/Guard file. BY ORDER, //True Copy// (Dy. /Asst. Registrar)/ P a g e | 14 ITA No.1645/MUM/2021 (A.Y.2015-16) BOMBAY FOOTWEAR PVT. LTD. Sr. Private Secretary ITAT, Mumbai