R.K. Irrigation Systems Ltd, Nr. Shastri Nagar Main Road V. ITO, NEC, Delhi, Delhi

ITA 165/RJT/2021

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 1715 (ITAT-RAJKOT)
• Duration Of Justice: 2 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 01-04-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 20-12-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V.J BORICHA
• Keywords: Sale consideration of property below Jantri Value; Set aside
• Section: 56; 143(3); 201; 143(2)

Judgement Text

आयकर अपील य अ धकरण, राजकोट यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (Conducted through Virtual Court) BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकरअपीलसं./ITA No. 165/RJT/2021 नधा रणवष /Asstt. Year: 2018-2019 M/s. RK Irrigation Systems Ltd., Flot No.704, B-H Haridwar Heights, Nr. Shastri Nagar Main Road, Rajkot-361005. PAN: AAICR1734L Vs. A.C.I.T, National Faceless Assessment Centre, Delhi. (Applicant) (Respondent) Assessee by : Shri Mehul Ranpura, AR Revenue by : Shri V.J Boricha, Sr. DR स ु नवाईक तार ख/Date of Hearing : 02/04/2 024 घोषणाक तार ख/Date of Pronounc em ent: 10/06 /2 024 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal filed by the assessee has been directed against the orders of ld. Commissioner of Income-Tax (Appeals)/ National Faceless Appellate Centre, Delhi (hereafter Ld. CIT(A), dated 07-12-2021 arising in the matter of assessment order passed under section 143(3) of the Income tax Act 1961 (in short, the ‘Act’) relating to Assessment Year 2018-19. ITA No.165/Rjt/2021 A.Y. 2018-19 2 2. The only issue raised by the assessee is that the Ld. CIT(A) erred in confirming the addition of Rs. 60,31,992/- made under section 56(2)(x)(B) of the Act on account of purchase of land property. 3. The facts in brief are that the assessee, a private company, is engaged in the manufacturing business of plastic products. The assessee company was selected for limited scrutiny assessment by issuing notice under section 143(2) of the Act. It was noticed by the AO from the ITS data that the assessee company has purchased land property vide conveyance deed dated 21 st April 2017 for Rs. 49 lakhs but the stamp value of the same was Rs. 1,09,31,292/- only. 4. As per the assessee company, in the previous year 2016-17, the promotors joined hands together to carry out the business of manufacturing pipes and fittings for which they decided to incorporate the assessee (incorporated w.e.f. 10- 03-2017). In the meantime, the promoters were looking for suitable land property for the purpose of factory premises and they found one such land property at village Amreli bearing revenue survey No. 128/1/P7 and 128/1/P8 admeasuring 15489 Sq. mts. and 8273 Sq. mts. respectively. The impugned land was agricultural land and due to the restriction placed on purchase of agricultural land upon the company, the promoters namely Shri Bhavesh Depani and Shri Vipul Bhimani decided to purchase the impugned agricultural land in their name. To this effect, the promotors of the assessee company entered MOU dated 03-06-2016 wherein it was agreed that the above-mentioned promotors will purchase the impugned agricultural land bearing survey numbers 128/1/p7 in their name on behalf of the proposed company (assessee company) and thereafter they will do necessary compliance to convert the same into non-agricultural land. Once the procedure for incorporation of assessee is completed and land is converted into non-agricultural, the same will be transferred to the newly established company. Thus, the said promoters purchased the agricultural land bearing survey number nos. 128/1/P7 and 128/1/P8 measuring 15489 Sq. mts. and 8273 Sq. mts. for ITA No.165/Rjt/2021 A.Y. 2018-19 3 consideration of Rs. 28,61,000/- and 15,31,000/- respectively vide purchase deed dated 15-07-2016. 5. Subsequently, after the conversion of land into non-agricultural and incorporation of the assessee company (10-03-2017), the impugned land was transferred to the assessee company (except for 543. Sq. mts.) vide conveyance deed dated 21-04-2017 at Rs. 49 Lakh on a cost-to-cost basis. Hence, the assessee was the beneficial owner right from the purchase of land by the promoter and legal owner after execution of conveyance deed. 6. The assessee further stated that the stamp value of the agricultural land when the promotors purchased the land in their name was Rs. 34,56,904/- which did not change, but stamp duty on the date conveyance deed in favor of the assessee company paid on higher value (Rs. 109,31,292) as the land on that date was converted into non-agricultural land. The assessee accordingly contended that there was no violation of provision of section 56(2)(x)(B) of the Act because the agricultural land purchased by the assessee company as a beneficial owner in the previous year 2016-17. The assessee in support of the above contention furnished copies of MOU dated 03-06-2016, Purchase deed dated 15-07-2016, conveyance deed dated 21-04-2017, bank statement, and other documents. 7. However, the AO held that the stamp value of the land purchased by the assessee company exceeds the consideration paid by more than Rs. 50,000/-. Hence the provisions of section 56(2)(x)(B) are attracted on the same and the difference in the consideration shall be deemed as income of the assessee from other sources. The contention of the assessee company that it was beneficial owner based on MOU dated 03-06-2016 is not acceptable for the reason that contents of such MOU are self-serving only and the MOU was also not notarized. Further, the director/shareholder and the assessee company are independent persons and distinct from each other therefore transactions entered by the assessee company and the shareholder/directors shall be considered ITA No.165/Rjt/2021 A.Y. 2018-19 4 independently. The AO further found that the assessee company was incorporated on 10-03-2017 whereas the impugned MOU was entered on 03-06-2016. Hence on the date of the MOU, the assessee company was not in existence and could not be part of the MOU. Therefore, the story of the assessee regarding purchase of land as beneficial owner is an afterthought. Thus, the AO treated the difference in the stamp value and purchase consideration for Rs. 60,31,292/- (1,09,31,292 – 49,00,000) as income of the assessee under the provision of section 56(2)(x)(B) of the Act and added the same to the total income of the assessee. 8. Subsequently the Ld. CIT(A) vide order dated 07-12-2021 confirmed the addition made by the AO by observing as under: 5.5 The main contention of the appellant company is that the promoters had purchases the agricultural land in question, in their names on 15/07/2016 in pursuance to an MoU dated 03/06/2016 between the company and promoters. The promoters had paid Rs.43,92,000/- the said purchase vide cheques dated 14/07/2016. It has been mentioned in the written submission that in the objection filed with the AO the taxpayer had submitted that "reason for purchase of lands in the individual names was the restriction placed by the government rules as per which a company cannot purchase the agricultural land from agriculturist without prior approval of the appropriate authority After purchase of the agricultural land by the promoters the land was converted to non-agricultural and then transferred to the company for Rupees 49 lac vide conveyance deed dated (21/4) / 2017 The stamp duty was paid as per prevailing jantri rates It had been stated that jantri value for agricultural land was 34,56,904/- but the value of non-agricultural land as per the jantri of the sub registrar was 1,09,32,653/- 5.6 The contention of the taxpayer is that the MoU was signed on 03/6/2016 prior to the purchase of land on 15/7/2016 and transferred to the company on (21/4) / 2017 and that the provision of section 56 (2) (x) inserted from (1/4) / 201 are not applicable in its case. The applicant has emphasized on the date of agreement/MoU and subsequent payment made by promoters by cheques to reiterate its claim regarding non-applicability of the provisions. 5.7 However, after careful consideration of the facts the following points emerge. - (i) the company was incorporated on 10/3/2017 Prior to this date any MOU or agreement undertaken by the company or anyone representing the company cannot have any legal sanctity. The AO has correctly treated the same as a self-serving document (ii) The property purchased by the promoters and the one purchased by the company cannot be considered as one and the same, because what the promoters had purchased was a piece of agricultural land which was converted to non-agricultural Admittedly, the stamp value of the agricultural land was much lower compared to the non-agricultural land ENT ITA No.165/Rjt/2021 A.Y. 2018-19 5 (iii) Admittedly the planning to buy the agricultural lang by promoters and transfer to the company after conversion was to bypass the legal requirement of prior approval from appropriate authority' (iv) As the value of the property has increased after conversion from agricultural land the provisions of section 56(2)(x) of the IT Act are fully applicable in the present case as the transfer of the property by the promoters to the company has been undertaken for inadequate consideration. The claim of the appellant that the promoters had made the payment by cheques does not come to the aid of the appellant's stand because the property that had been purchased by the promoters was an agricultural land in July 2016, whereas the property bought by the company on (21/4) / 2016 was a non- agricultural land. 5.8 In view of the above discussions, the action of the assessing officer is upheld and the grounds two and three raised by the appellant are rejected. 9. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 10. The learned AR before us filed a paper book running from pages 1 to 171 and contended that the purpose of acquiring the agricultural land was for the purpose of the company only which is evident from the MOU. According to the learned AR there is a prohibition for acquiring the agricultural land by the company and therefore the promoters had to acquire the piece of land for the company only in their names. Furthermore, at the relevant time, the company was not in existence. But later, the stamp duty value of the land got changed due to agriculture land being converted into non-agricultural land and the difference was treated as income of the assessee by revenue. However, the promoters acquired the land not for their personal purposes but for the company only. Therefore, such transactions cannot be treated as income under the provisions of section 56(2)(x)(B) of the Act. 11. On the other hand, the ld. learned DR supported the order of the authorities below. 12. We have heard the rival contentions of both the parties and perused the materials available. In the present case, the promoters of the assessee company executed a conveyance deed of land in favor of the company dated 21-04-2017 ITA No.165/Rjt/2021 A.Y. 2018-19 6 for the consideration of Rs. 49 Lakh whereas the stamp duty on the same was paid at the value of Rs. 1,09,31,292/- only. Thus, the difference between the amount was treated as income in accordance with the provisions of section 56(2)(x)(B) of the Act. However, the learned AR for assessee contended that property in dispute was agricultural property purchased in the immediate previous year i.e. on 15-07-2016 in the name of promoters of the assessee company for the purpose of factory/manufacturing plant. As such company was yet to be incorporated therefore the promoter purchased the impugned land for setting up manufacturing facility of proposed company and once the assessee company got incorporated on 10 th March 2017, immediately the conveyance deed was executed in the favor of the assessee company. Therefore, the stamp duty value for the purpose of section 56(2)(x)(B) of the Act should be taken as per the date of original purchase dated 15-07-2016. Thus, the question before us arise can the promoter of the assessee purchase or hold property in the name of the proposed company which has not come into existence yet or the assessee can be beneficial owner of the property even before it came into existence. 12.1 A company or corporation is regarded as an independent person in the eyes of law, but the fact is that it can never be materialized or come into existence by itself. Behind the formation of every company there are people or associations of persons who floats the idea of company and its business objective, and such persons are known as promotors. The promotors are obligated to bring company in the legal existence and obligated to ensure the successful running of the company after incorporation. Therefore, the promoters, in order to accomplish the idea floated, bringing the company into legal existence and ensuring successful running in future, may enter into some contract on behalf of the prospective company which generally called as pre-incorporation contract. It is pertinent to note that a problem regarding the validity of pre-incorporation contracts and binding of the same may arise. This problem has been dealt by the provision of section 15(h) and 19(e) of the Specific Relief Act 1963 which reads as under: ITA No.165/Rjt/2021 A.Y. 2018-19 7 15. Who may obtain specific performance.—Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by— ********* (h) when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 19. Relief against parties and persons claiming under them by subsequent title.— Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against— (e) when the promoters of a company have, before its incorporation, entered into a contract for the purpose of the company and such contract is warranted by the terms of the incorporation, the company: Provided that the company has accepted the contract and communicated such acceptance to the other party to the contract. 12.2 Thus, from the above discussion it is transpired that the promoters may enter contract on behalf of prospecting company even before the incorporation and such contract is valid. In the present case, the promotors decided to enter the business of manufacturing of pipes and fittings for this purpose they got incorporated the assessee company. For the manufacturing business of pipes and fittings, they required suitable land to set up a manufacturing plant. They found such suitable land, but the assessee company was not yet incorporated and considering the fact that land was agricultural land, they mutually decided to purchase the land in the name 2 promotors. It was agreed between them that once the proposed company (i.e. assessee company) gets incorporated and the land converted into NA land, then the land will be transferred in the name of the company. To This effect an MOU dated 30-06-2016 was entered among the promotors which is available on pages 11 to 19 of the paper book. At this juncture, it is also important to highlight that the AO doubted the validity of this MOU on the reasoning MOU was entered before the incorporation of the company then how the assessee company entered such MOU. We note that the AO misunderstood the content of the MOU as such assessee company is not the party of the MOU. The impugned MOU entered between the 3 promotors where they ITA No.165/Rjt/2021 A.Y. 2018-19 8 agreed for purchase of land for the business of purposed company, converting the same into NA land and then transferring the same in the name of company after corporation. 12.3 Thereafter the promoters executed the purchase deed in the name of 2 promoters as on 15-07-2016, applied for the name reservation and availability of the proposed name of the assessee company with MCA which reserved on 20-01- 2017 and finally company got incorporated from 10-03-2017. In between, the land got converted into non-agricultural land by the promoters and within the period of a month after the formation of the company i.e. as on 21-04-2017 the conveyance deed was executed in favor of the assessee. The consideration was charged on a cost-to-cost basis by the promoters without adding any margin. 12.4 Thus, from the above, there remains no ambiguity that the MOU dated 30- 06-2016 was translated into action. Hence it is established that the promoters purchased the land property on behalf of the company as on 15-07-2016 before pre-incorporation of the company. Therefore, in our considered opinion the conveyance deed dated 21-04-2017 was executed by the promoters in favor of the assessee company merely for completing its promise/contract entered by the promoters on behalf of company before incorporation and in the process the assessee company paid stamp duty as applicable on the date. As such the original transaction of purchase of land by the assessee company in the given facts and circumstances was 15-07-2016 from the farmers for a consideration which was higher than the value on which stamp duty paid. Accordingly, we hereby hold that the lower authority in the given facts and circumstances erred in invoking the provision of section 56(2)(x)(B) of the Act based on stamp duty paid on conveyance deed executed on 21-04-2017. Therefore, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is hereby allowed. ITA No.165/Rjt/2021 A.Y. 2018-19 9 13. In the result, the appeal of the assessee is hereby allowed. Order pronounced in the Court on 10/06/2024 at Ahmedabad. Sd/- Sd/- Sd/- Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 10/06/2024 TRUE COPY आदेशक त ल प े षत/Copy of the Order forwarded to : आदेशान ु सार/BY ORDER, उप/सहायकपंजीकार (Dy./Asstt.Registrar) आयकरअपील!यअ"धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation: 27/05/2024(Dictated on dragon software by Hon’ble Member) 2. Date on which the typed draft is placed before the Dictating Member /05/2024 3. Date on which the approved draft comes to the Sr.P.S./P.S. - /05/2024 4. Date on which the fair order is placed before the Dictating Member for Pronouncement /05/2024 5. Date on which the file goes to the Bench Clerk: /05/2024 6. Date on which the file goes to the Head Clerk.................................. 7. The date on which the file goes to the Assistant Registrar for signature on the order.......................... Date of Despatch of the Order.................. 1. अपीलाथ / The Appellant 2. !"यथ / The Respondent. 3. संबं धतआयकरआय ु $त/ Concerned CIT 4. आयकरआय ु $त(अपील) / The CIT(A) 5. %वभागीय!(त(न ध, आयकरअपील यअ धकरण/ DR, ITAT, 6. गाड*फाईल / Guard file.