GAUTAM R. PATEL, MUMBAI V. ACIT 8(1), MUMBAI

ITA 6667/MUM/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3625 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2007-2008
• Appeal Filed On: 16-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA
• Assessee Lawyers: D V LAKHANI
• Keywords: Capital asset; Business income; Cost of acquisition; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, PRESIDENT AND SHRI PRAMOD KUMAR, AM I.T.A. NO.6667/MUM/2010 (ASSESSMENT YEAR: 2007-08) SHRI GAUTAM R.PATEL, ABHIJIT, PLOT NO.B-9, 9/10 TH FLOOR, KAPOL CHS LTD. JUNCT ION OF 11 TH & V.M.ROAD, JVPD SCHEME, JUHU, MUMBAI-400 049. PAN:AABPP3694A VS. THE ASSISTANT COMMISSIONER OF INCOME TAX-8(1), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. D.V.LAKHANI RESPONDENT BY : MS. ASHIMA GUPTA, DR O R D E R PER R.V.EASWAR, PRESIDENT: THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT RELATES TO THE ASSESSMENT YEAR 200 7-08. THE ASSESSEE IS AN INDIVIDUAL DERIVING SALARY FROM COMP ANIES, BUSINESS INCOME, CONSULTANCY INCOME, CAR RENTALS AN D INCOME FROM OTHER SOURCES. HE IS A DIRECTOR IN ABHIJIT HOU SING PVT. LTD. 2. IN THE RETURN OF INCOME FILED FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE DECLARED CAPITAL GAINS OF RS.1,12,15,345(AFTER ADJUSTMENT OF LONG TERM CAPITA L LOSS) WHICH INCLUDED CAPITAL GAINS OF RS.1,63,81,464 FROM SALE OF A PROPERTY REFERRED TO AS NIGAM PROPERTY. THE NET SALE CONSI DERATION WAS SHOWN AT RS. 2,24,43,857 AGAINST WHICH DEDUCTION OF RS.60,62,393 AS INDEXED COST OF ACQUISITION WAS CLA IMED AND THE CAPITAL GAINS WERE DECLARED AT RS.1,63,81,464. WHEN THIS WAS ENQUIRED INTO BY THE ASSESSING OFFICER, IT WAS EXPLAINED BY THE ASSESSEE THAT HE AND A COMPANY BY NAME SMALL SU CCESS FINANCE & TRADING PVT. LTD., IN WHICH HE WAS A DIRE CTOR AT THAT TIME, HAD ACQUIRED A RIGHT IN THE NIGAM PROPERTY BY ENTERING ITA NO.6667/MUM/10 2 INTO AN AGREEMENT WITH THE OWNER OF THAT PROPERTY O N 3 RD FEBRUARY, 1998 IN TERMS OF WHICH HE WAS TO GET 75% AND THE COMPANY WAS TO GET 25% OF THE PROPERTY, THAT HE WAN TED TO BUILD A BUNGALOW FOR HIS RESIDENCE IN THE PROPERTY IN THE AREA HE GOT, THAT AFTER SOME TIME IT TRANSPIRED THAT THE OW NER OF THE PROPERTY COULD NOT OBTAIN VACANT POSSESSION OF THE PROPERTY DUE TO ENCUMBRANCES AND AN INJUNCTION OBTAINED BY ONE M R. KELA AGAINST NIGAM, THAT IN THE MEANTIME PROPERTY PRICES HAD SHOT UP AND THE ASSESSEE APPREHENDED THAT HE COULD NOT M USTER THE REQUIRED RESOURCES, THAT ANOTHER RICH BUSINESSMAN B Y NAME DILIP SANGHAVI AND HIS WIFE VIBHA SANGHAVI BECAME I NTERESTED IN BUYING THE PROPERTY BY PAYING HUGE AMOUNTS TO TH E TENANTS AND ALSO TO THE ASSESSEE, THAT IN THE LIGHT OF THES E DEVELOPMENTS THE ASSESSEE RECEIVED RS.3,00,00,000 AND WALKED OUT OF THE AGREEMENT WITH NIGAM, THAT A DEED OF CANCELLATION W AS ENTERED INTO ON 31-1-2007 FOR THIS PURPOSE AND IT WAS THIS AMOUNT OF RS.3 CRORES THAT WAS DECLARED AS LONG-TERM CAPITAL GAINS AFTER PERMITTED DEDUCTIONS. 3. THE ASSESSING OFFICER, ON A PERUSAL OF THE AGREE MENT DATED 3-2-1998 OBSERVED THAT THE ASSESSEE WAS NOT P ARTY TO THE SAME AND THEREFORE HAD NO RIGHT IN THE NIGAM PROPER TY. HE THEREFORE CALLED UPON THE ASSESSEE TO EXPLAIN WHY T HE AMOUNT RECEIVED COULD NOT BE ASSESSED UNDER THE HEAD INCO ME FROM OTHER SOURCES. THE ASSESSEE PUT FORTH ELABORATE SU BMISSIONS IN WRITING, WHICH ARE REPRODUCED IN THE ASSESSMENT ORD ER, EXPLAINING WHY IT SHOULD NOT BE ASSESSED AS INCOME FROM OTHER SOURCES AND SHOULD BE ASSESSED ONLY UNDER THE HEAD CAPITAL GAINS. 4. THE ASSESSING OFFICER REJECTED THE SUBMISSIONS O F THE ASSESSEE AND HELD AS UNDER: A) SINCE THE ASSESSEE WAS NOT PARTY TO THE MOU DATED 3 - 2-1998 HE COULD NOT HAVE OBTAINED ANY RIGHT IN THE ITA NO.6667/MUM/10 3 PROPERTY. HENCE THERE CAN BE NO QUESTION OF ANY CAP ITAL GAINS ON ALLEGED SURRENDER OF THAT RIGHT. B) THE COMPENSATION WAS RECEIVED UNDER AN AGREEMENT DATED 31-1-2007 WITHOUT ANY TRANSFER OF ANY RIGHT O VER THE PROPERTY AND HENCE TAXABLE AS INCOME FROM OTHE R SOURCES. C) THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN MANOJ B. DOSHI V ITO IS APPLICABLE TO THE FACTS OF THE CASE AND THE COMPENSATION IS ASSESSABLE AS INCOME FROM OTHER SOURCES AND NOT AS CAPITAL GAINS. ACCORDINGLY HE BROUGHT THE AMOUNT OF RS.1,83,43,857 , BEING THE DIFFERENCE BETWEEN THE NET CONSIDERATION OF RS.2,24 ,43,857 AND THE AMOUNT OF RS.41,00,000 (WITHOUT THE BENEFIT OF INDEXATION) PAID BY THE ASSESSEE AS THE ASSESSEES INCOME FROM OTHER SOURCES AND COMPLETED THE ASSESSMENT ACCORDINGLY. 5. THE ASSESSEE APPEALED TO THE CIT(A) WHO EXAMINED ALL THE RELEVANT DOCUMENTS AND HELD AS UNDER: A) THE MOU DATED 3-2-1998 WAS SIGNED BY THE ASSESSEE I N HIS CAPACITY AS DIRECTOR OF SMALL SUCCESS. THE MOU SPOKE OF CONSTRUCTION OF RESIDENTIAL HOUSES OVER AN FSI OF 15000 S.FT. IN THE PLOT OVER AND ABOVE THE FSI O F 15000 THAT WAS AVAILABLE IN RESPECT OF THE PLOT WHI CH WAS OF THE SIZE OF 1267.5 SQ.MT. (ROUGHLY EQUAL TO 15000 S.FT.). THE CONSTRUCTION ON THE ADDITIONAL FS I WAS TO BE DONE BY SMALL SUCCESS AND THE FLATS WERE TO BE SOLD BY IT FOR ITS OWN BENEFIT OR PROFIT. THERE WAS THUS A BUSINESS MOTIVE OF CONSTRUCTING RESIDENTIAL APARTMENTS AND SELLING THEM FOR PROFIT. B) IN AN AGREEMENT ENTERED INTO ON 15-1-1998 BETWEEN THE ASSESSEE AND SMALL SUCCESS THERE IS MENTION OF A BUNGALOW TO BE BUILT ON THE PLOT FOR THE RESIDENCE OF THE ASSESSEE IN HIS 75% SHARE OF THE PLOT. THIS ITA NO.6667/MUM/10 4 AGREEMENT IS AN AFTER-THOUGHT BECAUSE IT MENTIONS T HE MODALITIES OF THE WORKING OF THE AGREEMENT DATED 3- 2- 1998 WHICH IS NOT POSSIBLE UNLESS THE PARTIES HAD P RIOR KNOWLEDGE OF THE SAME. FURTHER, THE AGREEMENT DATED 15-1-1998 WAS NOTARIZED ONLY ON 13-2-1998 AS SEEN FROM THE DATE MENTIONED BY THE NOTARY, WHICH IS A D ATE AFTER THE MOU DATED 3-2-1998. THUS THE ASSESSEE HAS ATTEMPTED TO GIVE A COLOUR OF A SALE AND PURCHASE TRANSACTION IN THE AGREEMENT DATED 15-1-1998 THOUGH IN REALITY AND AS EVIDENT FROM THE AGREEMENT DATED 3-2- 1998 IT IS A PURE BUSINESS TRANSACTION OF CONSTRUCT ION AND SALE OF APARTMENTS/ROW HOUSES. C) THE CANCELLATION AGREEMENT DATED 31-1-2007 UNDER WHICH THE ASSESSEE RECEIVED THE COMPENSATION HAS AL SO TRIED TO GIVE COLOUR TO THE MOU OF 3-2-1998 AS A SI MPLE PURCHASE AND SALE TRANSACTION, WHICH IT WAS NOT. D) THE OWNERS OF NIGAM PROPERTY NEVER INTENDED TO TRANSFER ANY RIGHT IN THE PROPERTY TO THE ASSESSEE OR SMALL SUCCESS BUT ONLY INTENDED TO GIVE THEM A POWE R OF ATTORNEY FOR EFFECTING THE AGREEMENTS BETWEEN PROSPECTIVE BUYERS OF THE APARTMENTS TO BE BUILT ON THE PLOT. E) THE GIST OF THE MATTER IS THAT THE ASSESSEE ENTERED INTO AN AGREEMENT IN THE COURSE OF HIS BUSINESS, THAT TH E AGREEMENT WAS TERMINATED FOR WHICH HE RECEIVED COMPENSATION, THAT THUS THE RECEIPT AROSE IN THE COURSE OF THE BUSINESS FOR TERMINATION OF A TRADING CONTRACT AND WAS THUS INCOME FROM BUSINESS. IT MAY BE SEEN FROM THE ABOVE REASONING THAT THE CI T(A) VIEWED THE COMPENSATION RECEIVED BY THE ASSESSEE AS INCOME FROM BUSINESS, AS A RECEIPT RECEIVED FOR TERMINATION OF A TRADING CONTRACT WHICH IS A NORMAL INCIDENT OF THE BUSINESS , AND ITA NO.6667/MUM/10 5 ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO TAX T HE INCOME UNDER THE HEAD BUSINESS. 6. THE REVENUE SEEMS TO HAVE ACCEPTED THE DECISION OF THE CIT(A) IN SO FAR AS IT RELATED TO THE HEAD OF INCOM E UNDER WHICH THE COMPENSATION WAS TO BE TAXED, BUT THE ASSESSEE HAS CHALLENGED THE DECISION IN THIS APPEAL CONTENDING T HAT THE APPROPRIATE HEAD IS CAPITAL GAINS AND NOT BUSINE SS. THEREFORE WE ARE NOT TO EXAMINE WHETHER THE RECEIPT COULD BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 7. WE MAY EXAMINE THE FACTS IN SOMEWHAT MORE DETAIL . THE CHRONOLOGICAL EVENTS APPEAR TO BE LIKE THIS. ON 15- 1-1998 AN AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND SMALL SUCCESS FINANCE & TRADING PRIVATE LIMITED (IN WHICH HE WAS A DIRECTOR) ON STAMP PAPER OF RS.20/- PURCHASED BY TH E ASSESSEE ON 13-12-1997. IN THE AGREEMENT IT IS AVERRED THAT THE ASSESSEE AND SMALL SUCCESS HAD AGREED TO OWN AND CONSTRUCT A RESIDENTIAL BUNGALOW JOINTLY AS CO-OWNERS, THAT THE ASSESSEE HAD IDENTIFIED A PLOT IN NO.17, ESTATE OF THE NEW INDIA CHS LTD., N.S. ROAD NO.12, JVPD SCHEME, MUMBAI FOR THE PURPOSE, TH AT THE ASSESSEE WAS DESIROUS OF CONSTRUCTING A RESIDENTIAL BUNGALOW FOR HIMSELF IN THE AREA OF THE PLOT BELONGING TO HIM, T HAT SMALL SUCCESS WILL EXPLOIT THE AREA BELONGING TO IT BY CO NSTRUCTING A MULTI-STORIED BUILDING, THAT THE ASSESSEE WILL BE P HYSICALLY ENTITLED TO 75% AND SMALL SUCCESS WILL BE ENTITLED TO 25% OF THE PLOT, THAT THE TOTAL CONSIDERATION PAYABLE TO THE O WNER OF THE PROPERTY (NIGAMS) WAS RS.3500 PER S.FT. FOR THE 150 00 S.FT. OF FSI AVAILABLE TO THE PLOT AND THAT THE PURCHASE PRICE W OULD BE CONTRIBUTED IN THE RATIO OF 75% TO 25% BY THE ASSES SEE AND SMALL SUCCESS RESPECTIVELY. THOUGH THIS AGREEMENT I S SAID TO HAVE BEEN EXECUTED ON 15-1-1998, THE NOTARYS SIGNA TURE CARRIES THE DATE OF 13-2-1998. ON 3-2-1998 (REPEATEDLY REFE RRED TO IN THE ORDER OF THE CIT(A) AS 13-2-1998) A DOCUMENT ST YLED ITA NO.6667/MUM/10 6 MEMORANDUM OF UNDERSTANDING WAS EXECUTED BETWEEN THE NIGAMS WHO WERE REFERRED TO AS PLOT OWNERS AND SM ALL SUCCESS WHICH WAS REFERRED TO AS DEVELOPERS THERE IN. CLAUSE (1) OF THE MOU REFERRED TO THE REPRESENTATIONS MADE BY THE PLOT OWNERS (NIGAMS). THEY REPRESENTED TO THE DEVELOPERS , IN SUB- CLAUSE (B) THAT A TOTAL OF 2 FSI WAS AVAILABLE FOR CONSTRUCTION ON THE PLOT, MADE UP OF 1 FSI IN RESPECT OF THE PLOT, 0.40 FSI BY WAY OF RESERVATION TDR FOR GARDEN, ANOTHER 0.40 FSI FOR TDR FOR ROAD AND 0.20 FSI BY WAY OF SLUM TDR. IN SUB-CLAUSE (C) IT WAS FURTHER REPRESENTED BY THEM THAT IT WAS POSSIBLE TO CONSUME THE ENTIRE FSI OF 2 BY DEMOLISHING THE STRUCTURE IN THE PLOT AND CONSTRUCTING NEW STRUCTURES THEREON. IT ALSO LISTED OUT THE OPTIONS AVAILABLE AS TO HOW THE ENTIRE 2 FSI CAN BE UTILISED BY REFERRED TO PERMUTATIONS AND COMBINATIONS OF ROW HO USES AND A MULTI-STORIED BUILDING. RELYING ON THESE REPRESENTA TIONS, THE UNDERSTANDING ARRIVED AT BETWEEN THE PARTIES (NIGAM S AND SMALL SUCCESS), AS PER CLAUSE (2) WAS AS UNDER:- (A) THE DEVELOPERS TO CARRY OUT THE CONSTRUCTION ON THE SAID PROPERTY AT THEIR OWN COST AS IS FEASIBLE AND COMMERCIALLY VIABLE. THE OWNER AGREES TO PAY TO THE DEVELOPERS THE COST OF CONSTRUCTION IN RESPECT OF T HE AREA RETAINED BY THE OWNERS AT THE RATE OF RS.1350/ - PER SQUARE FEET IN RESPECT OF SUCH AREAS IN SUCH M ULTI- STOREYED BUILDING AND AT THE RATE OF RS.1500 PER SQ .FT IN RESPECT OF SUCH ROW HOUSES. (B) THE DEVELOPERS SHALL BE FULLY ENTITLED AND AT L IBERTY TO DEAL WITH AND DISPOSE OFF ON ANY BASIS FOR THEIR OWN USE AND BENEFIT AND APPROPRIATE FOR THEIR OWN USE A ND BENEFIT ALL THE SALE PROCEEDS IN RESPECT OF (I) CON STRUCTED FLATS/PREMISES HAVING AN AGGREGATE MINIMUM OF 15000 SQ.FT FSI IN RESPECT OF THE SAID PLOT AND ALL SUCH FLATS/PREMISES (INCLUDING PENTHOUSE IF ANY) TO BE SITUATED IN THE UPPER/HIGHER FLOORS OF SUCH MULTI S TORIED ITA NO.6667/MUM/10 7 BUILDINGS AND (II) THE DEVELOPERS SHALL BE ENTITLED TO TWO PARKING PER SUCH FLAT FREE OF COST FOR THE AREA TO BE RETAINED BY THE DEVELOPERS. (C) THE DEVELOPERS SHALL PAY TO THE OWNERS AN AMOUN T CALCULATED AT THE RATE OF RS.3500/- PER SQ.FT. IN R ESPECT OF SUCH 15000 SQ.FT OF FSI AGREED TO BE GIVEN TO TH E DEVELOPERS....... 8. THE TOTAL CONSIDERATION PAYABLE TO THE NIGAMS AS PER SUB- CLAUSE (C) THUS CAME TO 15000 S.FT. X RS.3500 PER S .FT. = RS.5,25,00,000 WHICH WAS PAYABLE BY THE DEVELOPERS (SMALL SUCCESS) AND THE ASSESSEE IN THE RATIO OF 25% : 75% RESPECTIVELY. THE MODE OF PAYMENT OF THE AMOUNT WAS ALSO PROVIDED FOR IN CLAUSES (I) TO (VI) OF THE SUB-CLAU SE (C). THESE SUB- CLAUSES, INTER ALIA, PROVIDED THAT THE AMOUNT WILL BE PAID PARTLY IN CASH AND PARTLY BY WAY OF ADJUSTMENT OF THE CONS TRUCTION COST OF THE STRUCTURE TO BE PUT UP FOR THE BENEFIT OF TH E NIGAMS BY USING 15000 S.FT. OF FSI AVAILABLE, IN ADDITION TO THE 15000 S.FT. OF FSI WHICH WAS PROPOSED TO BE SOLD BY THEM TO THE ASSESSEE AND SMALL SUCCESS. THAT IS TO SAY, SMALL SUCCESS WA S TO ACT AS BUILDER OR CONSTRUCTOR FOR THE NIGAMS IN RESPECT OF THE 15000 S.FT. ON WHICH THEY WANTED TO PUT UP A STRUCTURE FO R THEIR BENEFIT OUT OF THE TOTAL OF 30,000 S.FT. OF FSI AVAILABLE F OR THE PLOT ON THE BASIS OF 2 FSI FOR THE 15000 S.FT. PLOT. FOR SUCH C ONSTRUCTION, SMALL SUCCESS WOULD BE PAID AT THE RATE OF RS.1350 PER S.FT. UNDER CLAUSE (V) IN RESPECT OF AREA RETAINED BY TH E OWNERS IN SUCH MULTI-STOREYED BUILDING AND A FURTHER AMOUNT O F RS.1500 PER SQUARE FEET IN RESPECT OF ROW HOUSES. THIS AMO UNT WAS TO BE ADJUSTED AGAINST THE AMOUNT PAYABLE BY SMALL SUC CESS AND THE ASSESSEE FOR THE PURCHASE OF 15000 S.FT. OF THE PLOT. WE WISH TO CLARIFY THIS POINT BECAUSE THERE APPEARS TO BE S OME MISUNDERSTANDING AS TO THE TRUE PURPORT OF THE MOU. WE WILL ITA NO.6667/MUM/10 8 ADDRESS THIS POINT A LITTLE LATER. THE OTHER DUTIES AND OBLIGATIONS OF THE OWNERS ARE MENTIONED IN SUB-CLAUSE (D) OF CL AUSE (2). 9. ON 16-2-1998 A DOCUMENT STYLED AS DECLARATION C UM CONFIRMATION WAS EXECUTED BETWEEN THE ASSESSEE AND SMALL SUCCESS JOINTLY REFERRED TO AS PURCHASERS OR CO-OWN ERS ON THE ONE HAND AND THE NIGAMS (WHO WERE THREE IN NUMBER) ON THE OTHER HAND, WHO WERE REFERRED TO AS VENDORS. CLAUSE 1 OF THE DOCUMENT AFFIRMED THAT A COPY OF THE AGREEMENT DATE D 15-1- 1998 ENTERED INTO BETWEEN THE ASSESSEE AND SMALL SU CCESS WAS GIVEN TO THE VENDORS AND WAS ALSO ANNEXED TO THE DO CUMENT AND THAT THE VENDORS ARE FULLY AWARE OF THE CONTENTS TH EREOF. IT MAY BE RECALLED THAT THE AGREEMENT DATED 15-1-1998 CONT AINED THE TERMS AGREED TO BETWEEN THE ASSESSEE AND SMALL SUCC ESS INTER SE WITH REGARD TO THE PURCHASE OF THE PLOT FROM NIG AM AND THEY WERE BRIEFLY REFERRED TO EARLIER. CLAUSE 2 OF THE D ECLARATION PROVIDED THAT IF THE RULES OF THE JVPD SCHEME DO NO T PERMIT ANYBODY OTHER THAN INDIVIDUALS TO BECOME ITS MEMBER , THEN THE ASSESSEE HEREIN WILL BE ENTERED IN THE SOCIETY AS I TS MEMBER. CLAUSE 3 PROVIDED THAT THE TERMS AND CONDITIONS OF THE DECLARATION WILL BE BINDING ON THE PARTIES THERETO. 10. PURSUANT TO THE AFORESAID ARRANGEMENT, THE ASSE SSEE PAID A TOTAL CONSIDERATION OF RS. 23,00,000 BETWEEN 3-2- 1998 AND 14-7-2005 TO THE NIGAMS AND SMALL SUCCESS PAID RS.2 8,60,523 BETWEEN 1-7-2002 AND 14-7-2005. THE TOTAL PAYMENT T HUS AMOUNTED TO RS.51,60,523/-. 11. ON 31.1.2007 AN AGREEMENT STYLED AS AGREEMENT OF CANCELLATION WAS ENTERED INTO BETWEEN THE THREE NI GAMS ON THE ONE HAND AND THE ASSESSEE AND SMALL SUCCESS ON THE OTHER. A COPY OF THIS AGREEMENT WAS FILED BEFORE US BY THE A SSESSEE. CLAUSE 2 OF THE PREAMBLE RECORDED THE FACT THAT THE PURCHASERS/DEVELOPERS (I.E. THE ASSESSEE AND SMALL SUCCESS) ITA NO.6667/MUM/10 9 PROPOSED TO PURCHASE THE PLOT FOR DEVELOPMENT AND R ESIDENTIAL PURPOSE OF THE ASSESSEE AND HIS FAMILY IN THE MANNE R AND ON THE TERMS AND CONDITIONS AND FOR THE PRICE RECORDED IN THE MOU DATED 3 RD FEBRUARY, 1998 AND SUBSEQUENT AGREEMENTS BETWEEN THE PURCHASER/DEVELOPER AND THE OWNERS. THE ENTIRE HISTORY IS NARRATED THERE AND THERE IS REFERENCE TO THE FACT T HAT A TOTAL AMOUNT OF RS.51,60,523/-HAD BEEN PAID TO THE OWNERS OF THE PROPERTY, THAT SINCE THE PROPERTY WAS SITUATED WITH IN THE LIMITS OF COASTAL REGULATION ZONE (CRZ) CONSTRUCTION BY BR INGING IN TDS WAS NOT PERMISSIBLE AND THEREFORE DEVELOPMENT OF THE PLOT IN THE MANNER ORIGINALLY CONTEMPLATED BECAME FINANC IALLY UNVIABLE, THAT THE OWNERS HAD AGREED TO SELL THE PR OPERTY TO MRS. VIBHA DILIP SHANGHVI AND TO TRANSFER AND TO ASSIGN HER ALL THEIR RIGHTS IN THE PROPERTY FOR THE CONSIDERATION AGREED BETWEEN THEM AND THAT WITH A VIEW TO CLEAR THE CLAIMS OF THE ASS ESSEE AND SMALL SUCCESS UNDER THE MOU THE PLOT OWNERS HAD NEG OTIATED WITH THEM AND THEY HAVE AGREED TO RELEASE, RELINQUI SH, CANCEL AND IRREVOCABLY SURRENDER ALL THE RIGHTS THEY CLAIM ED UNDER THE MOU AND ALL SUBSEQUENT AGREEMENTS. CLAUSE 7 OF THE PREAMBLE REFERS TO PAYMENT OF RS.3 CRORES TO THE ASSESSEE AN D THE SMALL SUCCESS FOR GIVING UP THEIR RIGHTS IN THE MOU. CLAU SE 1 OF THE TERMS AND CONDITIONS RECORDS AND REAFFIRMS THE ARRA NGEMENT. 12. ON 2-4-2007, AN AGREEMENT TO ASSIGN WAS EXECU TED TO WHICH THE ASSESSEE WAS A CONFIRMING PARTY. THE OTHE R PARTIES TO THE AGREEMENT ARE THE THREE NIGAMS, FIVE CONFIRMING PARTIES INCLUDING THE ASSESSEE AND SMALL SUCCESS WHO ARE JO INTLY REFERRED TO AS THE 5 TH CONFIRMING PARTY, AND ONE MRS. VIBHA DILIP SHANGHVI. IT NARRATED THE EVENTS THAT LED TO THE NO N-EXECUTION OF THE SALE DEED IN FAVOUR OF THE ASSESSEE AND SMALL S UCCESS. BRIEFLY STATED, ONE NANDLAL H. KELA HAD OBTAINED AN INJUNCTION ON THE SALE OF THE PLOT BY THE NIGAMS ALLEGING THAT HE HAD A RIGHT TO OBTAIN CONVEYANCE OF THE PLOT IN HIS FAVOUR, A F ACT WHICH WAS ITA NO.6667/MUM/10 10 NOT KNOWN TO THE ASSESSEE WHEN HE ENTERED INTO AN A GREEMENT WITH THE NIGAMS TO ACQUIRE THE PLOT. THERE WERE TEN ANTS IN THE EXISTING BUILDING WHO CLAIMED INTEREST IN THE PROPE RTY BY WAY OF TENANCY OF THE SECOND AND THIRD FLOORS AND ALSO CLA IMED TO HAVE PAID MONIES TO THE NIGAMS FOR OBTAINING THE TENANCY . THUS SEVERAL ENCUMBRANCES AND IMPEDIMENTS TO THE SALE OF THE PROPERTY WERE THERE. ALL THESE ARE NARRATED AND THO SE TENANTS WERE ALSO INCLUDED IN THE AGREEMENT TO ASSIGN AS CO NFIRMING PARTIES. ULTIMATELY IT APPEARS THAT MRS. VIBHA DILI P SHANGHVI WAS PREPARED TO PAY A HUGE AMOUNT, ALMOST RS.21 CRO RES, FOR THE PROPERTY, UNDERTAKING ALSO TO PAY OFF THE TENAN TS AND THE ASSESSEE AND SMALL SUCCESS BY OFFERING ALL OF THEM SUBSTANTIAL AMOUNTS. CLAUSE (W) TO THE PREAMBLE TO THE AGREEMEN T NARRATES THAT THE ASSIGNORS (NIGAMS) PERSUADED THE ASSESSEE AND SMALL SUCCESS, WHO WERE JOINTLY THE 5 TH CONFIRMING PARTY, TO GIVE UP THEIR RIGHTS UNDER THE AGREEMENT WITH THEM IN RESPE CT OF THE PLOT FOR A CONSIDERATION OF RS.3,00,00,000 TO BE SP LIT BETWEEN THE ASSESSEE AND SMALL SUCCESS IN THE RATIO OF 75%: 25%. THE ASSESSEE THUS GOT RS.2,25,00,000 AND SMALL SUCCESS GOT RS.75,00,000 FROM VIBHA DILIP SHANGHVI. IT MUST BE CLARIFIED THAT THE ACTUAL RELINQUISHMENT AND SURRENDER OF THE RIGHTS OF THE ASSESSEE UNDER THE MOU WAS EFFECTED BY THE CANC ELLATION AGREEMENT DATED 31.01.2007 AND THE AGREEMENT TO AS SIGN EXECUTED ON 2.4.2007 REITERATED THE CANCELLATION AN D IN THIS AGREEMENT THE OTHER TENANTS WERE ALSO INCLUDED AS C ONFIRMING PARTIES AND MRS. VIBHA D.SANGHVI WAS ALSO INCLUDED AS THE ASSIGNEE. THE TRANSFER OF THE ASSESSEES RIGHTS UND ER THE MOU BY RELINQUISHMENT OR SURRENDER ACTUALLY TOOK PLACE ON 31.1.2007 UNDER THE CANCELLATION AGREEMENT. IT IS NOT IN DISP UTE THAT THE TRANSFER TOOK PLACE IN THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR 2007-08. ITA NO.6667/MUM/10 11 13. IT IS THE TAXABILITY OF THE AFORESAID AMOUNT RE CEIVED BY THE ASSESSEE THE HEAD OF INCOME UNDER WHICH IT IS TAX ABLE, TO BE PRECISE THAT IS THE QUESTION THAT ARISES IN THE A PPEAL BEFORE US. WHILE THE ASSESSEE HAS TAKEN A GROUND (GROUND NO.1) THAT THE AMOUNT IS A CAPITAL RECEIPT NOT TAXABLE AT ALL, IT WAS WITHDRAWN IN THE COURSE OF THE ARGUMENTS. THE ONLY CONTROVERS Y WHICH SURVIVES IS WHETHER THE AMOUNT IS TAXABLE UNDER THE HEAD CAPITAL GAINS AS CONTENDED BY THE ASSESSEE OR UND ER THE HEAD BUSINESS AS HELD BY THE CIT(A). 14. WE ARE OF THE VIEW THAT THE AMOUNT IS TAXABLE A S CAPITAL GAINS AS CONTENDED BY THE ASSESSEE. THE ASSESSEE H AD OBTAINED A RIGHT TO HAVE A CONVEYANCE EXECUTED BY THE NIGAMS IN RESPECT OF THE PLOT ADMEASURING 1267 SQ. MTS. IT IS TRUE TH AT THE ASSESSEE INITIALLY WAS NOT A PARTY TO THE MOU EXECU TED ON 3-2- 1998 BUT BY THE DOCUMENT TITLED DECLARATION CUM CO NFIRMATION EXECUTED ON 16-2-1998 HE BECAME PARTY TO THE TRANSA CTION BETWEEN SMALL SUCCESS AND THE NIGAMS. THE ASSESSEE HAD EARLIER ENTERED INTO AN AGREEMENT WITH SMALL SUCCES S WHICH SETS OUT THE ARRANGEMENT BETWEEN THEM INTER SE. THIS WAS ON 15-1- 1998. IT NARRATED THE TERMS OF THE MOU IN SUBSTANCE WITHOUT ACTUALLY REFERRING TO THE MOU. THIS HAS GIVEN RISE TO THE SUSPICION, WHICH WAS AIRED BEFORE US ON BEHALF OF T HE DEPARTMENT, THAT THE AGREEMENT WAS AN AFTER-THOUGHT AND WAS ACTUALLY ENTERED INTO AFTER THE MOU WAS ENTERED INT O THOUGH IT BORE AN EARLIER DATE. THIS SUSPICION WAS SOUGHT TO BE STRENGTHENED BY REFERRING TO THE FACT THAT THE AGRE EMENT, THOUGH PURPORTED TO HAVE BEEN EXECUTED ON 15-1-1998, WAS A CTUALLY NOTARISED ON 13-2-1998. IT MUST BE REMEMBERED THAT THE AGREEMENT IS BETWEEN THE ASSESSEE AND SMALL SUCCESS , WHICH IS A PRIVATE LIMITED COMPANY IN WHICH HE IS A DIRECTOR . KNOWLEDGE OF THE COMPANY IS IN FACT KNOWLEDGE OF THE ASSESSEE . IT MUST BE THE ASSESSEE HEREIN WHO WAS NEGOTIATING WITH THE NI GAMS FOR THE ITA NO.6667/MUM/10 12 PURCHASE OF THE PLOT. THEREFORE IT IS NOT UNUSUAL T HAT EVEN IN THE AGREEMENT EXECUTED ON 15-1-1998 THERE IS REFERENCE TO THE BROAD TERMS AGREED TO BETWEEN THE PLOT OWNERS AND S MALL SUCCESS. FURTHER, THE TERMS OF THIS AGREEMENT INCLU DE THE REFERENCE TO THE FACT THAT THE ASSESSEE WAS DESIROU S OF BUILDING A RESIDENTIAL BUNGALOW FOR HIS OWN RESIDENCE BY UTILI ZING 75% OF THE AREA OF THE PLOT. IN ANY CASE, THE STAMP PAPER WAS PURCHASED BY THE ASSESSEE ON 13-12-1997 WHICH IS MU CH BEFORE THE DATE OF THE AGREEMENT. THOUGH THIS MAY NOT BE C ONCLUSIVE, THERE ARE NO OTHER SUSPICIOUS FEATURES. IF THE DATE OF THE AGREEMENT IS TAKEN AS 13-2-1998, THE DATE ON WHICH IT WAS NOTARISED, THEN THE SAME BEING LATER THAN THE DATE OF THE MOU THERE SHOULD BE NO PROBLEM. IT IS ALSO POSSIBLE THA T THOUGH THE MOU WAS ACTUALLY EXECUTED ON 3-2-1998 THE NEGOTIATI ONS BETWEEN THE ASSESSEE BOTH ON HIS BEHALF AND ON BEHA LF OF SMALL SUCCESS WITH THE PLOT OWNERS WERE GOING ON FOR SOME TIME, AS THEY DO IN SUCH PROPERTY DEALS, AND THE ASSESSEE WA S ACTUALLY AWARE OF HOW THE ARRANGEMENT IS GOING TO BE. WE DO NOT SEE ANYTHING SERIOUSLY ADVERSE IN THE FACT THAT THE AGR EEMENT DATED 15-1-1988 REFERRED TO THE TERMS OF THE PURCHASE WHI CH WERE REDUCED TO WRITING IN THE MOU DATED 3-2-1998. 15. WHATEVER RIGHTS THE ASSESSEE WAS ENTITLED TO UN DER THE MOU READ WITH THE DECLARATION CUM CONFIRMATION DA TED 16-2- 1998 WITH THE NIGAMS, WHO WERE THE OWNERS OF THE PL OT, WERE RELINQUISHED AND SURRENDERED UNDER THE CANCELLATIO N AGREEMENT DATED 31.01.2007 AND WHICH WAS REAFFIRMED UNDER TH E AGREEMENT TO ASSIGN DATED 2-4-2007 TO WHICH THE A SSESSEE WAS A CONFIRMING PARTY. HIS RIGHTS WERE SURRENDERED TO MRS. VIBHA DILIP SHANGHVI WHO ULTIMATELY PURCHASED THE PLOT AF TER PAYING OFF ALL THE ENCUMBRANCES INCLUDING NANDLAL KELA AND THE TENANTS. WE HAVE EARLIER REFERRED TO THE TERMS OF T HIS AGREEMENT AND THE CIRCUMSTANCES UNDER WHICH THE ASSESSEE HAD TO ITA NO.6667/MUM/10 13 SURRENDER HIS RIGHTS FOR A CONSIDERATION. ON THESE FACTS, THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN CIT V TATA SERVICES LTD. (1980) 122 ITR 594 IS APPLICABLE. IT WAS HELD THAT THE WORD PROPERTY IN SEC.2(14) IS OF WIDEST AMPLI TUDE AND THE DEFINITION HAS RE-EMPHASISED IT USING THE WORDS OF ANY KIND AND ANY RIGHT WHICH CAN BE CALLED PROPERTY WILL BE INCLUDED IN THE DEFINITION OF CAPITAL ASSET. IT WAS OBSERVED THAT A CONTRACT FOR SALE OF LAND WAS CAPABLE OF BEING ENFORCED BY W AY OF SPECIFIC PERFORMANCE AND WAS ALSO ASSIGNABLE. THEREFORE, A R IGHT TO OBTAIN CONVEYANCE OF THE PROPERTY IS CLEARLY PROPER TY WITHIN THE MEANING OF SEC.2(14). A SIMILAR VIEW WAS TAKEN BY T HE HIGH COURT IN CIT V VIJAY FLEXIBLE CONTAINERS (1990) 186 ITR 693. IN THE PRESENT CASE THE ASSESSEE HAD A RIGHT TO ENFORC E THE MOU AND OBTAIN SPECIFIC PERFORMANCE OF THE AGREEMENT TO SELL AND INSIST ON THE NIGAMS EXECUTING A DEED OF CONVEYANCE IN RESPECT OF THE PLOT. THE ASSESSEE HAD ALSO PAID AN AMOUNT O F RS.23,00,000 OVER A PERIOD OF TIME TO THEM TOWARDS PURCHASE PRICE OF THE PLOT. EVENTUALLY THE DEAL DID NOT MATE RIALISE DUE TO VARIOUS REASONS AND THE ASSESSEE RELINQUISHED AND S URRENDERED HIS RIGHTS IN THE PROPERTY IN FAVOUR OF VIBHA SHANG HVI AFTER RECEIVING THE SUM OF RS.2,25,00,000 FROM HER. APPLY ING WITH RESPECT THE JUDGMENTS OF THE HONBLE BOMBAY HIGH CO URT CITED SUPRA WE HOLD THAT THE AMOUNT IS ASSESSABLE AS CAPI TAL GAINS. 16. THE CIT(A) HAS SPELT OUT A BUSINESS MOTIVE ON T HE PART OF THE ASSESSEE IN ORDER TO BRING THE AMOUNT TO TAX UN DER THE HEAD BUSINESS. FOR THIS PURPOSE HE HAS REFERRED TO THE FACT THAT THE ASSESSEE WAS TO DEVELOP AND SELL 15000 S.FT. OF THE FSI AVAILABLE IN RESPECT OF THE PLOT AND RECEIVE CONSTRUCTION COS T OF RS.1350 PER S.FT. HE HAS VIEWED THE MOU AS A DEVELOPMENT AG REEMENT. THERE SEEMS TO BE, WITH RESPECT, A MISREADING OF TH E MOU. AS WE HAVE ALREADY NOTED, THE PLOT WAS OF 15000 S.FT. WIT H FSI OF 2 WHICH MEANS 30,000 S.FT. CAN BE BUILT THEREON. THE ASSESSEE ITA NO.6667/MUM/10 14 AND SMALL SUCCESS WERE TO ACQUIRE ONLY THE PLOT WHI CH IS OF 15000 S.FT. AND COULD BUILD, FOR THEIR OWN USE, ONL Y 15000 S.FT. THE ADDITIONAL FSI OF 15000 S.FT. DID NOT BELONG TO THEM BUT WAS TO BE RETAINED BY THE OWNERS THEMSELVES. AFTER REPR ESENTING TO THE ASSESSEE/SMALL SUCCESS THAT THE TOTAL FSI AVAIL ABLE WAS 30,000 S.FT., IN CLAUSE 2(A) OF THE MOU THE OWNERS THAT IN RESPECT OF THE AREA RETAINED BY THE OWNERS, WHICH IS 15000 S.FT. OF FSI, THE DEVELOPER (I.E., SMALL SUCCESS) WILL CA RRY OUT THE CONSTRUCTION FOR WHICH THE OWNERS WILL PAY THE DEVE LOPER RS.1350 PER S.FT. FOR THE AREA IN THE MULTI-STORIED BUILDING AND RS.1500 PER S.FT. IN RESPECT OF ROW HOUSES TO BE BU ILT BY THE DEVELOPER IN THE FSI BELONGING TO THE OWNERS. CLAUS E 2(B) GIVES THE RIGHT TO THE DEVELOPER TO USE THE CONSTRUCTION PUT UP IN THE FSI OF 15000 S.FT. BELONGING TO THE DEVELOPER FOR I TS OWN USE OR TO DEAL WITH OR DISPOSE OF THE SAME FOR ITS OWN BEN EFIT. THE AREA OF CONSTRUCTION REFERRED TO IN THIS CLAUSE IS OF 15 000 S.FT. WHICH IN ANY CASE BELONGS TO THE DEVELOPER (JOINTLY WITH THE ASSESSEE). THE REFERENCE IS NOT TO THE FSI OF 15000 SFT. WHICH THE OWNERS ARE RETAINING FOR THEMSELVES IN RESPECT OF WHICH TH E CONSTRUCTION WORK IS TO BE ENTRUSTED TO THE DEVELOPER AT A PRICE . IN FACT, SUCH CONSTRUCTION COST OF RS.1350 PER SFT. IN RESPECT OF THE MULTI- STORIED BUILDING AND RS.1500 PER SFT. IN RESPECT OF THE ROW HOUSES TO BE BUILT BY THE DEVELOPER ON THE FSI RETA INED BY THE OWNERS IS TO BE ADJUSTED AGAINST THE PRICE PAYABLE BY THE PURCHASERS OF THE PLOT AS PER SUB-CLAUSE (VI) OF CL AUSE 2(C). THIS CLAUSE WOULD HAVE BEEN UNNECESSARY IF THE OTHER FSI OF 15000 S.FT. IS ALSO TO BELONG TO THE DEVELOPER AS CLAIMED BY THE DEPARTMENT. CLAUSE 2(C) PROVIDES FOR THE PAYMENT OF CONSIDERATION FOR THE PLOT MEASURING 15000 S.FT. AT THE RATE OF RS.3500 PER S.FT. WHICH AMOUNTS TO RS.5,25,00,000. IN THIS CLAUSE, THERE IS CLEAR REFERENCE TO 15000 SQ FT OF FSI AGREED TO BE GIVEN TO THE DEVELOPERS. A POWER OF ATTORNEY IS TO BE GIVEN TO THE DEVELOPER ONLY FOR ENABLING HIM TO ENTER THE PR EMISES FOR ITA NO.6667/MUM/10 15 DEVELOPMENT AND TO ENTER INTO AGREEMENT WITH THE PU RCHASERS OF THE FLATS FOR AREA TO BE RETAINED BY THE DEVELOPERS . THUS A PERUSAL OF THE TERMS OF THE MOU AS A WHOLE SHOWS TH AT IT IS ONLY WITH REFERENCE TO THE ADDITIONAL FSI OF 15000 S.FT. THAT SMALL SUCCESS IS TO CONSTRUCT THE STRUCTURE WHICH WILL BE LONG TO THE OWNERS AND FOR SUCH CONSTRUCTION SMALL SUCCESS WILL CHARGE THE OWNERS AT THE AGREED RATE WHICH WILL BE ADJUSTED AG AINST THE PRICE PAYABLE BY SMALL SUCCESS FOR THE PLOT. THE C IT(A), WITH RESPECT, APPEARS TO HAVE THOUGHT THAT THE ADDITIONA L FSI IS TO BELONG TO THE ASSESSEE AND SMALL SUCCESS WHICH THEY ARE GOING TO DEVELOP FOR THEIR OWN PROFIT. IT IS FROM THE FAC TUALLY ERRONEOUS FINDING THAT HE HAS DRAWN THE CONCLUSION THAT THERE IS A BUSINESS MOTIVE AND HENCE THE RECEIPT FOR SURRENDER ING THE RIGHTS OVER THE PROPERTY SHOULD BE ASSESSED AS BUSI NESS PROFITS, TREATING IT TO BE A CASE OF A NORMAL CANCELLATION O F A CONTRACT ENTERED INTO IN THE COURSE OF THE BUSINESS OF CONST RUCTING AND SELLING PROPERTIES. THE ENTIRE CASE-LAW REFERRED TO BY HIM HAS BEEN HELD APPLICABLE ON THE BASIS OF THE ERRONEOUS CONCLUSION. 17. WE WISH TO REFER TO ONE MORE ASPECT OF THE CASE . IT IS THAT SMALL SUCCESS WHICH RECEIVED RS.75 LAKHS AS COMPENS ATION FOR RELINQUISHING ITS RIGHTS UNDER THE AGREEMENT WITH N IGAMS HAD DECLARED THE SAME UNDER THE HEAD CAPITAL GAINS IN ITS RETURN FOR THE ASSESSMENT YEAR 2007-08 AND THE SAID RETURN HAD BEEN ACCEPTED UNDER SECTION 143(1) OF THE ACT, A COPY OF WHICH IS PLACED AT PAGE 40 OF THE PAPER BOOK. THERE IS NO RE ASON FOR THE INCOME TAX AUTHORITIES TO TAKE A DIFFERENT VIEW IN RESPECT OF THE ASSESSEE. 18. WE THEREFORE HOLD THAT THE CIT(A) WAS NOT RIGHT IN HOLDING THAT THE RECEIPT SHOULD BE ASSESSED TO TAX UNDER TH E HEAD BUSINESS. THE ASSESSEES CONTENTION THAT IT SHOUL D BE ASSESSED UNDER THE HEAD CAPITAL GAINS WITH ALL THE ALLOWAB LE DEDUCTIONS ITA NO.6667/MUM/10 16 IS UPHELD. THE ASSESSING OFFICER IS DIRECTED TO ASS ESS THE SAME UNDER THE HEAD CAPITAL GAINS AFTER EXAMINING THE CLAIM FOR THE DEDUCTIONS AFTER GIVING DUE OPPORTUNITY TO THE ASSE SSEE TO SUPPORT THE CLAIM. 19. THE APPEAL IS PARTLY ALLOWED IN THE ABOVE TERMS . NO COSTS. ORDER PRONOUNCED ON THIS 15 TH DAY OF DECEMBER, 2010 IN THE OPEN COURT. SD/- ( PRAMOD KUMAR ) SD/- ( R.V.EASWAR ) ACCOUNTANT MEMBER PRESIDENT MUMBAI, DATED 15 TH DECEMBER, 2010. SOMU COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT (A)-16, MUMBAI. 4. THE CIT-8 MUMBAI 5. THE DR G BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI