PR COMMISSIONER OF INCOME TAX V. M/S IND SING DEVELOPERS P LTD

ITA/541/2015

AI Insights

The case revolves around an appeal by the Revenue against M/s. Ind Sing Developers P. Ltd., concerning the deletion of an addition of Rs.14 Crores under the head of capital gains by the Tribunal. The primary legal question was whether the Tribunal was justified in law in deleting the addition of Rs.14 Crores made under the head of capital gains when the settlement agreement revealed there was an agreement for outright transfer of land together with all the rights. The Tribunal examined whether an Association of Persons (AOP) was formed and if so, whether it was liable for capital gains tax upon its dissolution and distribution of assets. The Tribunal concluded that the AOP was not liable for capital gains tax as the distribution of assets did not amount to a transfer of capital assets.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 758900 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 02-03-2016
• Assessment Year: misc
• Other Referred Cases: CIT Vs. Indira Balakrishnan, Ch Atchaiah's case, Oberoi Hotels Pvt. Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: JEEVAN NEERALGI
• Keywords: AOP; Capital Gains; Income Tax; Settlement agreement; Transfer of property
• Section: 2(47); 45(4); 45(3); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF MARCH, 2016 PRESENT THE HON'BLE MR. JUSTICE JAYANT PATEL AND THE HON’BLE MRS. JUSTICE B.V.NAGARATHNA ITA NO.541/2015 BETWEEN 1. PR. COMMISSIONER OF INCOME TAX, C. R. BUILDINGS, QUEENS ROAD, BANGALORE - 560 001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 11(4) BANGALORE. ... APPELLANTS (BY SRI. JEEVAN J. NEERALGI FOR SRI. E. I. SANMATHI, ADV.) AND M/S. IND SING DEVELOPERS P. LTD., NO.208, WEST MINISTER, CUNNINGHAM ROAD, BANGALORE - 560 052, PAN: AABCI 2107C. ... RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 17/04/2015 2 PASSED IN ITA NO. 629/BANG/2009, FOR THE ASSESSMENT YEAR 2005-06. THIS ITA COMING ON FOR ADMISSION THIS DAY, JAYANT PATEL J. DELIVERED THE FOLLOWING: J U D G M E N T The appellants-Revenue has preferred the present appeal by raising the following question of law: “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs.14 Crores made under the head capital gains when the settlement agreement reveals there was an agreement for outright transfer of land together with all the rights and as per Sec.2(47) the word transfer includes relinquishment of rights?” 2. We have heard Mr.Jeevan J. Neeralgi appearing on behalf of Mr.E.I.Sanmathi, learned counsel for the appellants-Revenue. 3 3. It appears that the Tribunal while dealing with the said aspects has observed thus: “16. We have perused the orders and heard the rival contentions. The question to be answered by us are i) Was there any intention by the parties to form an AOP. ii) If there indeed was an AOP is there an incidence of capital gain. iii) If there indeed was an AOP would the non filing of return by such AOP affect the stand or claim of the assessee. iv) If there indeed was an AOP, would the money received by the assessee as a member thereof on extinguishment of the AOP be deemed as capital gains. v) If there was no AOP what was the date of transfer of subject property to M/s. Parkway Developments Pvt. Ltd., ie, whether such transfer was a) AT the time of MOU? b) At the time of principle agreement? c) At the time of settlement deed? 4 d) At the time of execution of conveyance deed? 17. Taking up each of these questions, in a sequential manner, first we will check whether there was any AOP. For this it is required to have a look at the legal parameters, which can throw light as to under what circumstances existence of an AOP can be substantiated. Section 4 of the Act creates a charge in respect of total income of every person. Definition of “person” in Section 2(31) of the Act, indeed has a category called an “Association of Persons” or “Body of Individuals”, whether incorporated or not. However there is no definition of AOP as such in the Act. The landmark judgment of Honorable Apex Court in the case of CIT Vs. Indira Balakrishnan (supra) gives the meaning of the word associate as “to join in common purpose or to join in action”. Since these words occur in the section which imposes a tax on income of an assessee, it must necessarily be one with an objective to 5 produce income, profit or gains. Thus the essentials for an AOP are: a) Two or more persons joining in a common purpose. b) The purpose of such joining is to produce income profits or gains. c) The combination or joining is Voluntary. 18. At this juncture it will be inappropriate if we do not mention that Explanation inserted by the Finance Act 2002, to Section 2(31) of the Act has obviated the requirement for having, production of income, profits or gains, as an essential object for forming an AOP. However the CBDT Circular explaining the above insertion states that such insertion was only to take care of the claim of certain bodies that they did not fall within the definition of a ‘person’ for the sole reason, that they were not supposed to have any income or profits. Section 3 of 1922 Act though it provided an option to the assessing officer either to assess an AOP or its member, whichever was beneficial to the revenue, this option is no 6 more there under the corresponding charging section 4 of the present Act. This has been clearly brought out by Hon. Apex Court in the case of Ch Atchaiah’s case (supra). The scheme of taxation of AOP under different circumstances has been laid out in Section 167B of the Act. The taxation of the members of the AOP is dealt with under Section 67A of the Act. If the income of the members exceed the maximum amount which is not chargeable to tax then the total income of AOP is to be taxed at maximum marginal rate. By virtue of Section 86 read with Section 110 of the Act, if an AOP is chargeable to tax at maximum marginal rate then the share of profits in the hands of the members is not chargeable to tax at all. 19. Now against the above contours of taxability of an AOP, we have to see the facts of the case before us. The first in the series of agreement/understandings is the MOU dated 22.05.1995 between the assessee and Shri Pradeep Kumar Sharma. This MOU as 7 appearing in Paper Book pages 17 to 23 is reproduced hereunder: “THIS MEMORANDUM OF UNDERSTANDING is made on this the 22nd day of May One Thousand Nine Hundred and Ninety Five (1995) BETWEEN (1) GOPALAKRISHNA GOWDA, son of late Lonkappa, residing at Voderally, Thathaguni Post, Bangalore South Taluk; (2) IND – SING DEVELOPERS PRIVATE LTD, a Company registered under the Companies Act, 1956, having its Registered Office at 208, Westminster Complex, No.13, Cunningham Road, Bangalore 560 052, represented herein by its Director S. Eswar Prasad, hereinafter together called “the First Party” AND PRADEEP KUMAR SHARMA of 73, Meyer Road, Singapore, or HIS NOMINEES, hereinafter called “the Second Party”. WHEREAS: 1. The First Party represents to the Second Party: A. That the first member of the First Party has, under two separate agreements dated 6th July 1990 and dated 22nd June 8 1989 registered as No.3343/89-90 agreed to purchase all that piece and parcel of land in Survey Nos. 19 and 20 together measuring 9 acres of Ambalipura village, Varthur Hobli, Bangalore South Taluk from the owners of the said survey numbers B. That the first member of the First Party has nominated the second member of the First Party to purchase the land in the above survey numbers. C. That the said land is free of all encumbrances, charges and liens and is also capable of being developed into a group housing project as per the Revised Comprehensive Development Plan – Zoning of Land Use and Regulations approved by Government vide G.O. No.HUD 139 MNJ 94 DATED 5-1-1995. II. The First Party has offered to the Second Party or his nominees the Joint development rights of the above Survey Numbers which offer the Second Party has accepted in good faith and on the above representations of the First Party. 9 III. This MOU is being signed by the parties broadly setting out the terms and conditions agreed to by them. I. OBLIGATIONS OF THE FIRST PARTY The First Party shall perform the following obligations within sixty days from this day: 1. Furnish remaining documents of title and the information called for by Messrs. King & Partridge and otherwise establish the title to Survey No.19 and 20. 2. Increase the subscribed and paid up equity share capital of the second member of the First Party from the present Rs.5 lakhs to Rs.50 lakhs. There shall be no change in the constitution of the Board of Directors of Ind- Sing Developers Pvt. Ltd. without the written consent of the Second Party. Disputes, if any, regarding the amount of stamp duty and registration charges (undervaluation) paid on the sale deeds shall be resolved and the original sale deeds furnished to King & Partridge for their scrutiny. All title deeds to be delivered to the Second Party for custody. 10 3. After approval of the plans by the Bangalore Development Authority comply with the galore Development Authority’s letter No.BDA/IPM/DD(E)/1287/92-93 dated 12th November 1992 and furnish to King & Partridge in original no objection letters from K.E.B., B.W.S.S.B., receipted challans for having paid the statutory charges/levies as also the work order. The period of sixty days will not apply to this part of the condition and the Second Party will not make this a condition precedent for signing the formal agreement. The removal of shops on Bangalore Sarjapur Road shall be unconditional and without any obligations on the project. 4. Divert the overhead electric cable now passing through the land and obtain permission of the State Government (Irrigation Department) for the use of the pipeline land for passing and repassing. Provision to be made for adequate supply of water during construction of project and later until supply from B.W.S.S.B Mains is established. 11 The First Party and the Directors of Ind-sing Developers Pvt. Ltd., will agree to keep and hold the Second Party and his nominees indemnified and harmless against any loss or damage arising due to defective title of the owners to the land. Separate indemnity bonds to be executed in due course. II. OBLIGATIONS OF THE SECOND PARTY 1. Preparation of the project layout plan, building plans, typical floor plans, specifications and furnish the relevant plans to the First Party for submission to the BDA for approval. 2. Appointment of Architects, Civil Engineers, surveyors and supervisors and core project team to oversee the project. 3. Manage and execute the project in accordance with the approved plans and specifications. 4. All legal documentation between the promoters and flat buyers. Appoint legal firm to handle all project matters. 5. Marketing of the flats, publicity both in India and overseas. 12 III ENTITLEMENT OF THE PARTIES IN THE PROJECT The First Party and the Second Party shall be entitled to 40% and 60% respectively in the built area of the project. This is on the assumption that the project is entitled to a minimum of 2.5 F.A.R. If F.A.R is less than 2.5 there will be pro-rata reduction in the First Party’s entitlement. Finer details of the mode of sharing will be decided later. IV. Second Party shall in consultation with the First Party market and manage the entire project, including First Party’s entitlements. Second Party has this day paid the First Party Rs.5,00,000/- (Rupees five lakhs only) as consideration for this MOU vide Demand Draft No.0321124 dated 12th May 1995 drawn on Bank of India, in favour of Ind-Sing Developers Pvt. Ltd. This amount will be adjusted against First Party’s entitlement. If the parties are unable to enter into a formal agreement for any reason whatsoever within seventy five (75) from the date of this MOU, the said sum of Rs.5,00,000/- (Rupees Five 13 Lakhs only) shall be refunded to the Second Party forthwith. VI. Board of Directors for First Party have passed resolution authorizing Mr. Eswar Prasad, a Director to sign this MOU. VII. parties shall, after the First Party complies with their obligations, sign a formal agreement and submit for the approval of Income Tax Authorities.” 20. What strikes us from the above MOU is that assessee was not at all the owner of the property on the said date. Shri. Gopalakrishna Gowda had agreed to purchase the subject property through two agreements from its owners and these agreements between Shri. Gopalakrishna Gowda had nominated assessee in his place for acquiring the land. Assessee was to produce the documents of title and deposit such title deeds with M/s. King and Partridge. Assessee was to bring the property into a stage fit for development. Shri. Pradeep Kumar Sharma was to prepare the project plan, building plan, and execute 14 the project. However marketing and management of the project was to be done by Shri. Pradeep Kumar Sharma in consultation with the assessee. 21. Now we will have a look at the principal agreement dated 12.07.1995 between assessee and Shri. Pradeep Kumar Sharma. After reciting the narration of the events starting from the MOU dated 22.05.1995, it is mentioned as under at paragraph b & c of the preamble. “B. In terms of the said MOU, the First Party’ has substantially established the title of the present owners to the above immovable property and has now started the process of securing the title to the above land from the present owners. C. Pending the First Party securing the transfer of title to the property and pending compliance with the obligations at clauses 2, 3 and 4 of the MOU, this Agreement is being entered into by the parties to place on record the terms and conditions agreed upon by them” 22. Shri. Pradeep Kumar Sharma undertook to develop the subject property and construct residential apartments therein vide the above 15 agreement. Articles 1 to 15 of this agreement are reproduced have under. “ARTICLE 1 This Agreement is in addition to and not in derogation of the MOU dated 22nd May 1995. However, should there be any inconsistency between this Agreement and the MOU, the provisions of this Agreement shall prevail. ARTICLE 2 2. The property in Survey Nos.19 and 20 of Ambalipura Village, Varthur Hobli, Bangalore South Taluk is fully described in the Schedule hereunder written and delineated in red on the plan annexed hereto and hereinafter called “the contract property”. The First Party hereby permits the Second Party to enter into and upon the contract property (including the land occupied by the shops, when vacated) for the purpose of carrying out the development contemplated in this Agreement. ARTICLE 3 3.1 The Second Party shall develop the contract property and construct thereon as 16 many blocks of buildings comprising of residential apartments with such facilities of common usage, electrical, water and sewerage installations as may be sanctioned and approved by the Governmental authorities. 3.1.1 The development of the contract property contemplated in this Agreement will be in such phases as the Second Party may decide in consultation with the First Party. 3.2. The Second Party shall, with due regard to the prevailing market conditions and exigencies commence and complete the development of the contract property within such time schedule as the Second Party may decide in consultation with the First Party. 3.3. The Second Party shall not be deemed to be in default if the performance of his obligations herein is delayed or prevented by conditions constituting ‘force majoure’ which shall include but not limited to any laws, orders, bye-laws, rule or direction of any Governmental authority or Municipal or statutory agency, restraints, injunctions, withdrawal of permissions, non-availability of 17 construction materials, strikes, or any concerted action of workmen delaying or interrupting the work, fire or any act of God or any other reason or cause whatsoever beyond the Control of the Second Party. ARTICLE 4 4.1. The Second Party shall develop the contract property on sound financial lines. 4.2. In the event that it is necessary for the second Party to procure loans sufficient to meet financial requirements for the development and tenders require financial assurance or the security Contract Property, the contract property shall be so mortgaged by the first Party and if any other personal guarantee is given by the parties, their liability in such guarantee shall be 40% and 60% respectively. Provided that the Second Party shall be responsible for rendering contract property free of all encumbrances before the title is passed on to the intending purchasers. 18 ARTICLE 5 The Second Party shall be exclusively entitled to market the residential flats to the intending purchasers on such terms and conditions as agreed and in consultation with the First Party. ARTICLE 6 The price for the sale of undivided share in the land payable by the intending purchasers shall be at Rs.150/- per sq.ft of the undivided share required to be purchased by the intending purchasers which the Second Party shall upon receipt from the intending purchasers credit to a separate account in its books and shall pay to the First Party after completion of each phase of the development as per Article 8. ARTICLE 7 7.1 The Second party has at the time of entering this Agreement paid the First Party a sum of Rs.2,500,000/- (Rupees Two and a half million only) vide Demand Draft NO.162654 dated 12-7-1995 drawn on Canara Bank, Lavelle Road, Bangalore. This 19 amount and Rs.5 lakhs already received by the first Party under the MOU and further amount of Rs.70 lakhs to be paid shall be a deposit with the First Party and be adjusted against the amount payable to the First Party under Article 8. 7.2 Mr. S. Eswar Prasad and Mr. Muniswamy, the Directors of the First Party hereby personally guarantee the repayment of the deposit of Rs.30 lakhs by the First Party. This guarantee shall continue until the First Party, after securing the transfer of title of the contract property, deposits the title documents with the Second Party and on such deposit of the documents, the guarantee shall stand “ipso facto” revoked. ARTICLE 8 8.1 In consideration of the First Party offering the contract property for development and rendering various services and performing obligations on its part, the First Party shall be entitled to receive from the Second Party a sum equivalent to 40 percent of the net profits arising from the sale of the 20 apartments, subject to taxes as may be applicable. 8.2 For the purpose of Article 8.1, the net profits shall be arrived at after deducting from the gross receipts all expenses incurred by the Second Party for the development and for promotion and marketing campaigns, depreciation relating to fixed assets acquired for the development and related expenses and the sale price of the undivided share in the land at the rate of Rs.150/- per square foot payable by the intending purchasers as per Article 6 hereof. 8.3 The amount payable to the First Party under Article 8.1 be paid together with the sale price of the land after the completion of each phase of the development in all respects as per the statement of accounts duly audited by a reputed firm of Chartered Accountants appointed by the Second Party. ARTICLE 9 For the purpose of carrying out the development of the contract property as contemplated in this Agreement, the First Party hereby assures the Second Party that: 21 9.1 The contract property is freehold land and is free from all acquisitions, encumbrances, charges, gifts, lien, attachments, liabilities unauthorized occupations, claim and litigation of any manner whatsoever and that except a few tenants who are in occupation of the buildings situate in a part of the contract property facing the road, there are no other tenants in the contract property. 9.2 The First Party hereby agrees and undertakes to keep the contract property free from all encumbrances, charges and liens for the duration and full implementation of this Agreement in all respects. 9.3 The First Party shall perform its obligations at clause Nos.2, 3 and 4 of the MOU within thirty (30) days hereof. As regards provision of water for the project, the First Party shall provide the source of water at its cost and the cost of infrastructure for drawing the water from the source shall be that of the project. Upon the tenants vacating the shops the First Party shall ensure that the 22 shops are demolished and the land occupied by the shops in annexed to the main land and fenced. 9.4 The First Party hereby agrees and undertakes to indemnify the Second Party and keep him indemnified against any cost, expenses, loss, damages whatsoever that the Second Party may suffer or incur by any reason of the whole or any part of the aforesaid representation and declaration of the First Party of the aforesaid representation and declaration of the First Party being incorrect or due to any act or omission of the First Party and any person claiming through or under them. ARTICLE 10 The First Party further agrees and covenants as follows: 10.1 At its own cost and expense, it shall furnish and provide all such information including documents, correspondences, statements and data as may reasonably be required by the Second Party in respect of the contract property and its development and 23 selling rights including but not limited to a General Power of Attorney in favour of the Second Party or his nominee/s authorizing the attorney to do, execute and perform such acts, deeds and things as may be necessary in order to carrying out the development of the contract property and the sale of the undivided right in the contract property in favour of the intending purchasers and transfer all title to the intending purchasers. 10.2 At its own case and expense obtain from the relevant Governmental authorities all planning sanctions and approvals necessary (in its own name after obtaining the transfer of mutation from the name of the previous owners) for carrying out the development of the contract property, including but not limited to payment of all levies at the rate prevailing as on this date payable to the Bangalore Development Authority prior to or at the time of the obtaining of the planning sanctions and approvals. (If there is any escalation in the rates of levies relating to Cauvery Water III/IV 24 Stage after the date of this Agreement, such escalation shall be borne by the project). 10.3 At its own cost and expense to protect the vacant possession of the contract property and facilitate the commencement and completion of the development of the Second Party. 10.4 To do all acts necessary to procure the transfer of title in the contract property and the mutation thereof to itself and promptly deposit the title deeds including the registered sale deeds in his favour for the contract property with the Second Party. 10.5 To sign on the request of the Second Party such documents, applications, letters and other papers as may be necessary for the development of the contract property including those required for obtaining / purchasing of the building materials and utilities like water, power, sewerage connection and otherwise for giving full and complete effect to the terms of this Agreement. 25 ARTICLE 11 The Second Party hereby agrees and convenants as follows: 11.1 To co-ordinate, supervise and mainly to carrying out the development of the contract property. 11.2 To promote and carry out marketing campaigns for the sale of the completed development. 11.3 To maintain proper accounts of all the expenses incurred for the development, promotion and marketing campaigns and all other expenses in fulfilling his obligations under this Agreement. ARTICLE 12 The parties herein covenant as follows: 12.1 The operations of the parties hereto is based on a friendly, close and balanced relationship as participants in the development of the contract property. 12.2 Each of the parties undertakes that it / he will at all times act on the principles of good faith in the widest sense 26 and in a bonafide manner and in the best interest of both the parties. 12.3 All obligations and rights expressed herein are to be honoured and exercised in conformity with the principles of good faith and with mutual regard. 12.4 Matters not provided herein shall be decided through consultation conducted with sincerity between the parties. ARCTICLE 13 The parties, during the term of this Agreement and thereafter, shall maintain secrecy of all confidential or proprietary information or data belonging to any party or any of their affiliates (collectively proprietary Material”). Upon completion of the project, each of the parties of such party, as the case may be, shall immediately deliver to the applicable other party all written documentation, including copies of or concerning such Proprietary Materials of such other party, shall make no further use thereof, and shall make reasonable efforts to ensure that no further use thereof be made by the 27 employees, agents or contractors of the delivering party. ARTICLE 14 s 14.1 The First Party hereby expressly consents for the assignment of the benefits and obligations of the Second Party herein in favour of any Company whether incorporated in India or otherwise provided that assignment is made by notice in writing given by the Second Party to the First Party and on such assignment, the assignee is deemed to be aware of and bound by the terms and conditions of this Agreement. PROVIDED THAT THE SECOND PARTY SHALL 14.2 Take quick steps to incorporate the Company in India and be a Director therein: 14.3 Apply for and obtain, after the incorporations of the Company, relevant approvals from the Government and / or Reserve Bank of India, and 28 14.4 assign this Agreement in favour of the Company within thirty (30) days of receipt of all the approvals from the Government and / or Reserve Bank of India. PROVIDED ALSO THAT 14.5 Until the completion of the project, there shall not be any change in the constitution of the Board of Directors of the Company without the First Party’s consent. PROVIDED FURTHER THAT 14.6 If the Second Party opts not to assign this Agreement, he shall apply for the obtain the approvals of the Government and / or the Reserve Bank of India as may be applicable. ARTICLE 15 All notices required or permitted to be transmitted to any party under or pursuant to the provisions contained in this Agreement shall be sent to the addresses of the parties given at the commencement of this Agreement and shall deemed to have been served on the parties if sent by Registered Post Acknowledgement Due.” 29 23. A reading of the above clearly show that a profit sharing ratio of 40:60 is agreed between the parties and assessee was to give the property as a collateral security for raising loans for funding the project. The value of the land has been fixed at Rs.150/sq.ft which was to be paid only after completion of each phase of the project. Apart from this, a sum of Rs.1 crore was paid/payable by Shri. Pradeep Kumar Sharma to the assessee. Both parties had specific obligations set out in this agreement. 24. The supplementary deed dated 17.06.2002 which happened after a considerable period of time revised the profit sharing ratio from 40:60 to 20:80. But for this there were no major changes in the principal agreement. A general power of attorney was also executed by the assessee on 20.11.2002 which clearly showed that by that point of time, assessee had acquired the subject property on which development was being carried out. Clause 12, 13 & 16 of this POA is reproduced hereunder. 30 “12. TO negotiate for sale of the undivided interest in the land situate in the said property and / or the built area in the proposed construction either as a whole or in such parts as our attorneys shall deem fit, to enter into agreements for sale of undivided interest, agreements to build, Memorandum of Understanding etc., and to receive from the purchaser or purchasers any earnest money and also the balance purchase money and to give good, valid receipt and discharge for the same which will protect the purchaser or purchasers without seeing the application of the money. 13. Upon such receipt as aforesaid as our act and deed, to sign and execute any conveyance or conveyances of the undivided interest and / or the built area in favour of the said purchaser/s or his/her nominee or assignee. 14……. 15……. 16. TO present any such conveyance or conveyances for registration, to admit execution on receipt or consideration before 31 the Sub-Registrar or Registrar having authority over and to have the said conveyance registered and to do all acts, deeds and things which our said attorneys shall consider necessary for conveying the undivided interest and / or the built area to the said purchaser or purchasers as fully and effectually in all respects as we would do the same ourselves.” 25. The sequence of events and the pertinent clauses of the MOU and the principal agreement clearly shows that at the time that MOU and principal agreement was entered into, assessee was still in the process of acquiring the subject property and clearing the title of the original vendor. It is not a case of pure development agreement where one of the parties was the absolute owner. Both the assessee as well as Shri. Pradeepkumar Sharma who later assigned his rights to M/s. PDP. Ltd., had one common intention. That was to develop the property, sell the flats and share the profits. No doubt a price of Rs.150/- sq.ft for the land has been fixed, but land was the capital to be introduced by the 32 assessee for the purpose of endeavor. That assessee had considerable stake, is clear from the fact that asseessee was obliged to offer the land as security for raising loans. Assessee had parted with possession with clear knowledge that it was entitled only to 40% of the net profits after the deduction of value of land at the rate of Rs.150/- sq. ft. Thus the intention of the assessee was to reap and share in the profit on eventual sale of flats to be constructed and not to transfer property as such to M/s. PDP Ltd., In our opinion the essential conditions for forming an AOP as set out by the Apex Court in the case of Indra Balakrishnan Supra were satisfied. The two parties had voluntarily combined, they had combined for a common purpose and their main objective was to produce profit. 26. Once we conclude that there indeed was an AOP, the 2nd question is whether there was an incidence of capital gains. For answering this a look at section 45(3) and Section 45(4) of the Act are necessary. These sections are reproduced hereunder:- 33 Sec.45(3) : The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co- operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the 34 fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. The capital asset here, which was the land, could be considered as transferred to the AOP in the year in which assessee entered the principal agreement. This happened much before the impugned assessment year. Even if we consider that assessee could have introduced this capital in the AOP only after acquiring the property, even this happened much before the currency of the relevant previous year. Resultantly there was no capital gains on account of the land being introduced by the assessee into the AOP, during the relevant previous years. 27. Now it is necessary to have a look at the settlement deed for verifying whether there was any incidence of capital gains at that point of time. Article 1 to 4 of the settlement deed dated 2nd April 2004 is reproduced hereunder: Article I- Assignment: 35 (1) The FIRST PARTY confirms that in pursuance to the development Agreement they have permitted the SECOND PARTY to carry out construction/ development on the Schedule Property. The SECOND PARTY is entitled to continue to carry out the developments and construction as provided therein for the project “SPRINGFIELD” and the FIRST PARTY covenants that they shall not interfere with such development and construction. (2) The FIRST PARTY does hereby assign, transfer and convey all the Agreement for sale of undivided share on the Schedule property of the project “SPRINGFIELD” entered into by the FIRST PARTY through the nominees of the SECOND PARTY who have acted under the terms of the said Power of Attorney. The Second Party has the right to retain the consideration received in the name of the FIRST PARTY in pursuance to the said Agreements of the Sale and also receive the remainder consideration in the name of the SECOND PARTY or their nominee or assign. The SECOND PARTY shall indemnify and 36 keep the FIRST PARTY indemnified as against any claim made by any person as per such Agreements of Sale. (3) The FIRST PARTY do hereby ratify all the acts and deeds done by the nominee to the SECOND PARTY in pursuance to the said powers of attorney as to the project viz., “Spring fields” the various steps taken. The SECOND PARTY through their nominee shall be entitled to continue to exercise all powers under the said Power of attorney. Article-II- Development Agreement: (1) In consideration of the representations made, obligations undertaken, covenants to be observed mutually and the consideration reserved herein, the parties have mutually agreed to enter into this agreement. (2) Due to the dispute infra, the parties have agreed that it is no longer feasible to proceed with developing the Schedule Property as per the scheme provided in the Development Agreement and therefore even through the entire project has not yet been completed and sale proceeds have not yet been entirely 37 realized and Phase III of the project SPRINGFIELD is yet to be launched it is in the best interest of each party to come to a settlement. The consideration agreed to be paid herein is not based on the benefits accruing to the FIRST PARTY or SECOND PARTY under the Development Agreement and whereas it has been arrived at with the help of the Conciliator and on mutual agreement by the parties hereto, to amicably resolve disputes and allow the SECOND PARTY to peacefully develop the Schedule Property. The consideration agreed to be paid is for the FIRST PARTY to forego all their rights benefits entitlement and interest as provided in the Development Agreement whatsoever and to convey the Schedule Property to the SECOND PARTY or their nominee or assigns. The SECOND PARTY is entitled to all rights, powers entitlement as provided in the Development Agreement which shall be read in conjunction with such additional rights, entitlement and interest as provided herein. 38 (3) Upon conveyance of the Schedule Property by the FIRST PARTY to the SECOND PARTY or their nominee/assigns the Development Agreement shall lapse. (4) On receipt of the consideration as per Article III, the FIRST PARTY shall transfer, convey and assign the absolute ownership of the Schedule property to the SECOND PARTY or their nominee or assigns which shall be free from all encumbrances, claims, lis, charges, third party interest, minor interest acquisition (etc and henceforth the SECOND PARTY shall alone be in possession of the Schedule Property. Article-III- Consideration (1) The SECOND PARTY has agreed to pay the FIRST PARTY in full and final settlement for the FIRST PARTY as on this date foregoing all their rights in the Development Agreement and to convey the absolute right, title or interest in the Schedule Property free from all encumbrance/claims/lis and, a sum of Rupees Twenty Crores (Indian Rupees) and in consideration thereof the FIRST PARTY shall 39 forego all their rights under the Development Agreement and shall convey the Schedule Property to the SECOND PARTY or their nominees or assigns and shall release the SECOND PARTY of all their obligations to FIRST PARTY in the past, present and further the FIRST PARTY shall perform all such acts and deeds as provided herein. (2) The party of the Second Part agree to pay the aforesaid consideration within sixty days from this day to the FIRST PARTY. (3) Out of the total sum of a sum of Rupees Twenty Crores, a sum of Rupees Fourteen Crores shall be paid to the FIRST PARTY for foregoing their rights under the Development Agreement and the remainder sum of Rupees Six Crores shall be paid for the sale and purchase of the Schedule Property by the FIRST PARTY to the SECOND PARTY or their nominees or assigns. (4) The Consideration of Rupees Twenty Crores (Indian Rupees) for foregoing the rights of the FIRST PARTY under the Development 40 Agreement and for the sale and purchase of the Schedule Property shall be paid by the SECOND PARTY to the FIRST PARTY in the following manner: a. The SECOND PARTY shall pay the FIRST PARTY a sum of Rupees Fourteen Crores by i. Appropriating a sum of Rs.1,36,54,500/- only already paid by the SECOND PARTY to the FIRST PARTY the receipt of which the FIRST PARTY admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. ii. Appropriating a sum of Rs.75,12,001/- (Rupees seventy five lakhs twelve thousand and one only) already paid by the SECOND PARTY to the FIRST PARTY the receipt of which the FIRST PARTY admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. iii. The SECOND PARTY shall pay the FIRST PARTY a further sum of Rs.4,92,65,092/- (Rupees four crores ninety 41 two lakhs sixty five thousand and ninety two only) within 60 days from this day. iv. Paying Rs.6,95,08,400/- (Rupees six crores ninety five lakhs eight thousand four hundred only) within 60 days from this day by allotting to the FIRST PARTY or their nominees or assigns 27 number of residential Apartments @ Rs.1300.00 per square feet of super built area along with 27 number of car parks @ Rs.1,25,000.00/- car park of the Project “Springfield’s” constructed on the Schedule Property in the Phase I within eighteen months from this day and Phase II within twenty four months from this day and which are situated in the said Apartment Complex as per the Allocation List appended hereto. The SECOND PARTY shall on completion of the construction of the said Apartments execute deeds of sale conveying the same along with proportionate undivided share of land in the Schedule Property in favour of the FIRST PARTY or their nominee or Assigns. The FIRST PARTY shall solely bear the cost of stamp duty under the Karnataka Stamp Act and registration Fee, misc. 42 expenses etc. as provided under the Registration Act and all other sums in common and as payable by other Apartment Owners as appended hereto and which are subject to the Rights and Restrictions and obligations as appended hereto. Provided always in the event the FIRST PARTY retains all the said apartments in their own name or in their nominee(s) name call upon the SECOND PARTY to execute the Sale deeds as to the same in their name or their nominee name, the stamp duty shall be borne by the SECOND PARTY. b. The SECOND PARTY shall pay the FIRST PARTY the remainder sum of Rupees Six Crores within 60 days from this date which shall be appropriated as Sale consideration for conveyance of the Schedule Property in favour of the SECOND PARTY or their nominees. The said sum shall be paid in the following manner: i. By Appropriating Rs. 1,50,20,000/- (Rupees one crore fifty lakhs twenty thousand only) which has already been 43 received by the FIRST PARTY, the receipt of which the FIRST PARTY admits and acknowledge as per the appropriation receipt annexed hereto. ii. A sum of Rupees Two Crores shall be paid on the execution of this Agreement. The FIRST PARTY admits and acknowledges the said sum received as per cheque No.952242, drawn on Lord Krishna Bank for Rupees Fifteen Lakhs, cheque No.234650, for Rupees One Crore drawn on Lord Krishna Bank and Cheque No. 066293 for Rupees fifty lakhs drawn on Lord Krishna Bank, all dated this day, iii. The balance sum of Rs. 2,49,80,000/- (Rupees two crores, forty nine lakhs eighty thousand only) shall be paid by the SECOND PARTY to the FIRST PARTY simultaneously and on executing a Deed of Conveyance conveying the absolute right, title and interest of the Schedule Property to the SECOND PARTY or their nominees or assigns and such sale shall be free from all encumbrances, claims, us, charges, third party interest, minor interest, acquisition proceedings etc., 44 iv. The Original Deeds of Title of the Schedule Property has already been delivered to the Second Party by the First Party as stated herein above. Article IV Possession and Development: (1) In view of the rights enjoyed and steps taken by the SECOND PARTY under the Development Agreement the FIRST PARTY affirms and reiterates that they have and now irrevocably permitted and authorized the SECOND PARTY to carry out construction/development on the Schedule Property by entering upon the Schedule Property. The SECOND PARTY is entitled to continue to carry out the developments and construction as provided therein for the project “SPRINGFIELD” and the FIRST PARTY covenants that they shall not interfere with such development and construction. (2) The FIRST PARTY does hereby once again reaffirm that the rights of the Second Party under the Development Agreement and the SECOND PARTY or their agents or contractors or architects or surveyors or work men or 45 persons claiming under them to enter the Schedule Property for undertaking the development of the same and the FIRST PARTY covenants to the SECOND PARTY that such permission shall not be revoked. A copy of the joint memo filed in this regard in the suit pending is enclosed herewith as Annexure. (3) The FIRST PARTY confirms that they have signed and shall also further sign and execute all applications / papers / documents as required and do all acts and deeds and things as the SECOND PARTY may lawfully require in order to obtain licenses, sanction plan for such construction and also to legally and effectively vest in the SECOND PARTY or its nominees title to the Schedule Property and for completing the development of the Schedule Property. The FIRST PARTY shall not interfere or obstruct the course of construction of the Apartment Building in view of their rights to the Schedule Property and the benefits accruing under the Development Agreement being determined as stated hereinabove. 46 (4) The FIRST PARTY having confirmed the rights of the SECOND PARTY under the Development Agreement and their rights under the Development Agreement having been foregone for the consideration received, they shall not revoke the permission and authorization given herein to the SECOND PARTY to enter the schedule property and continue to develop the same as the SECOND PARTY will be incurring expenditure for construction. (5) Provided always and notwithstanding anything contained hereinabove, in the event the SECOND PARTY commits breach of this Agreement the FIRST PARTY shall seek redressal in the manner provided herein below and not do any act unilaterally in view of the substantial consideration having already been received on this date. It is clear from Section 45(4) of the Act, that profits and gain if any, arising on transfer of capital by way of distribution of capital assets, assets is assessable in the hands of the AOP only and not in the hands 47 of its members. The settlement deed practically put an end to the AOP and transfer of title in the land to M/s. PDP was nothing but distribution of the capital assets of the AOP on its dissolution. 28. This bring us to the next question as to whether AOP having not subjected itself to tax by filing a return of income, would render the asseessee liable to pay tax on the transfers effected by AOP. In our opinion, this question is academic. It is for the reason that the issue here is whether the asseessee was taxable to capital gains in the impugned assessment year for the sum of Rs.14 crores. That the AOP had not submitted itself for taxation or the failure of the AOP to make a return of income, would not shift the tax incidence to its members. Especially so, since charging Section 4 of the Act in contrast to Section 3 of the 1922 Act does not give any power to the assessing officer to tax a member of AOP in lieu of taxing the AOP. 29. This bring us to the next question as to whether the money received by the asseessee 48 based on the settlement which happened in the relevant previous years could be charged to capital gains in asseessee’s hand. The settlement clearly showed that the AOP as such stood terminated. The differences that cropped up between the members of the AOP is clear from the suit filed by M/s PDP. Ltd., before the Civil Court, copy of which has been placed before us as at Paper book pages no. 54 to 85. This suit show that the parties intended a joint development, but were unable to agree on various duties and responsibilities that they had undertaken to do, bringing the project to a limbo and leading to the cancellation of Power of Attorney by the asseessee. The parties thought that the joint development was no more feasible. Thus in lieu of the 20% share of profit which would have arisen to the asseessee in future, asseessee agreed to receive Rs. 14 crores. We can see it either as the share of profit, the asseessee would have received in future from the AOP or a capital receipt. Both parties to the settlement were Private Limited Companies. Even if they had an income of 49 one rupee, it was chargeable to tax at flat rates. It in other words it means that the profit of the AOP was always taxable in the hands of the AOP at maximum rates. Once the profits are taxable in the hands of AOP, by virtue of Section 86 read with Section 110 of the Act, the share income is not taxable in the hands of the members. Even otherwise the source of income for the asseessee had totally extinguished. Admittedly asseessee was not holding any other land or fixed asset as it is clear from the Balance Sheet placed at paper book page no. 13. By virtue of the judgment of the Apex Court the case of Oberoi Hotels Pvt. Ltd (Supra) what asseessee received would be considered as capital receipts. 30. No doubt, asseessee itself had returned capital gains in the impugned assessment year, considering the land to have been transferred by it, in the relevant previous year. In our opinion, however this cannot help the case of revenue. Just because an erroneous admission of income had been made it would not make the asseessee liable 50 to tax, for the simple reason that the charge of tax is on income computed in accordance with Section 5 of the Act and not based on the admission of income where there was no income of the nature admitted.” 4. The aforesaid shows that the Tribunal mainly considered two aspects. At the time of Association of Person (hereinafter referred to as the ‘AOP’) was formed, the said AOP could have been considered for the taxation purpose on the ground of capital gain. But, the said AOP neither filed return nor was assessed for the purpose of taxation. The AOP was formed in the year 1995. The activities of the AOP were also continued for some time and it is only in the year 2004, on account of dispute, settlement was entered into between the members of AOP and the properties were distributed. It has been held by the Tribunal that when distribution of assets takes place the same is not transfer of assets. Further, the Tribunal has taken note of the fact that the assessment at Rs.14 Crore is on 51 the basis of 20% share of the profit which the assessee would have earned in future. The Tribunal has taken note of the fact that the share of the income is not taxable in the hands of the members. Ultimately, the Tribunal found that the addition of Rs.14 Crore made under the head of capital gain was incorrect and the said addition is ordered to be deleted. 5. Learned counsel appearing for the appellants contended that if such mode is permitted by formation of AOP and thereafter to transfer the property under the head of distribution, the property would be transferred and the Department would not be able to recover any tax on capital gain and therefore, the question would arise for consideration in the present appeal. 6. We are not at all impressed by his submission for the obvious reason that the right person should be taxed and merely because the right person could not be taxed, it is not open to the Revenue to tax 52 a wrong person. Merely because the AOP at the relevant point of time could not be assessed for tax is not a valid ground to tax a member of an AOP at the time when AOP is dissolved and the properties are distributed. 7. We do no not find any substantial question of law would arises for consideration as sought to be canvassed. Hence, the appeal is dismissed. SD/- JUDGE SD/- JUDGE TL "