Jayant Jhaveri, CIT-DR for the Revenue. Aarti Sathe, AR for the Assessee.

The captioned appeals filed by the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)-2, Mumbai and arise out of the assessment completed u/s 143(3) (of Income Tax Act, 1961) r.w.s. 147 (of Income Tax Act, 1961) (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience. We begin with the assessment year (AY) 2011-12.

2. The 1st to 6th ground of appeal :

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in appreciating the fact that the assessee is engaged in the business of land development and construction and has constructed and sold commercial premises during the year under consideration.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in appreciating the fact that the assessee shows in the Balance Sheet, the construction expenditure incurred as the Capital Work in Progress.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in appreciating the fact that the assessee cannot escape from offering its profits for taxation merely if it shows the said activity by different nomenclature in the books.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in appreciating the fact that the assessee company had made major changes in the Articles of Association by attaching the space in building to be sold to the shares of the company, the action on the part of the assessee company is ultra-virus of the Company's Act, 1956.

5. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in directing the AO to delete the addition of Rs.3,49,23,699/- on account income from sale of Lodha Supremus Building without appreciating the fact that as per AIR information during the year under consideration the assessee company has sold units worth Rs.32,81,74,835/-form which the assessee earned income of Rs.3,49,23,699/-.

6. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in directing the AO to delete the addition of Rs.18,80,000/- on account proportionate income from sale of Lodha Supremus Building without appreciating the fact that all the benefits, rights and interest are with the assessee by assignment and assumption agreement dated 03/11/2009 made between the parties, Rangnath Somani (on behalf of M/s. Onkarmal& Company) and assessee.

3. Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2011-12 on 24.11.2011 declaring total income of Rs. Nil. It is engaged in land development and construction of real estate properties. The assessee is a wholly owned subsidiary of Shreeniwas Cotton Mills Ltd. (SNCML), who in turn is a wholly owned subsidiary of Adinath Builders Ltd. (ABL). SNCML was a listed company controlled by Somani family. SNCML owned two pieces of land near Lower Parel. Over a period of time, SNCML ran into financial problem and was ordered by the Bombay High Court into liquidation. Therefore, ABL, a Lodha Group Company engaged in development of real estate, with a view to acquire and develop the land owned by SNCML, acquired all the shares of SNCML and SNCML became its wholly owned subsidiary company. On the land owned by SNCML, there was a godown. ABL entered into an agreement with Rangnath Soman which included demerging the godown rights to a new company on 18.01.2008. Subsequently, as mutually agreed between the parties, Rangnath Somani (for and on behalf of his assigns/beneficiary of M/s Onkarmal & Company) vide an assignment and assumption agreement dated 03.11.2009 vested all benefits, rights and interest under the said godown to the assessee for a lump sum consideration of Rs.3.25 crores. Thereafter, the assessee and SNCML entered into a contribution agreement dated 31.03.2011, whereby it was agreed that the assessee shall construct a building “Lodha Supremus” on the land owned by SNCML for which cost shall be borne by SNCML by way of shareholders contribution. The amended ‘Articles of Association’ of the assessee inter alia provided for granting right to use and occupy the units in the project to its shareholders. It was also agreed that SNCML would sell the shares of the assessee which would entitle the buyer of the shares to possess and occupy the designated constructed area. The sale proceeds of shares of the assessee shall be accounted as business receipts by SNCML. In view of the above arrangement, the assessee-company was left with no right to occupy or sale or lease or deal in any manner with the units of “Lodha Supremus” as their rights were attached to the shares of the assessee-company and total shareholding of the assessee was with SNCML. Hence, SNCML being holder of the shares of the assessee, carrying right to premises, had entered into an agreement with the third party buyers for transfer of equity shares of KHL as a result of which rights in the units in “Lodha Supremus” stood transferred.

During the financial year (FY) 2010-11, the SNCML has recorded a sales consideration of Rs.32,81,74,835/- and resultant income thereof was offered to tax. Therefore, the assessee submitted that in absence of transfer of units in “Lodha Supremus”, neither a sale can be recorded in the books of the assessee nor any income can be said to have arisen in the hands of the assessee and consequently, no income can be brought to tax in the hands of the assessee.

However, the AO was not convinced with the above explanation of the assessee and made an addition of Rs.3,49,23,699/- holding that out of the total estimated profit from the units sold in “Lodha Supremus” 50% profit belongs to the assessee and estimated the profit as under :

Particulars Amount (Rs.)

Total sales recorded by SNCML 32,81,74,835/-

Alleged estimated profit @ 20% on above sales [Rs.32,81,74,835 X 20%] 6,56,34,967/-

Estimated ON Money received from the project which is offered before the ITSC by SNCML 1,91,47,416/-

As per ITSC 22% of ON Money is construed as income. 42,12,431/-

Therefore, Total Income from project is Rs.6,56,34,967 + Rs.42,12,431

6,98,47,398/-

50% of this Total Income attributable to M/s SNMCL & the Balance to Appellant Company 3,49,23,699/-

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 23.06.2017, the Ld. CIT(A) held that the AO has made the addition of Rs.3,49,23,699/- i.e. proportionate revenue from sale of units of “Lodha Supremus” that has been entirely offered to tax by SNCML, ignoring the fact that the assessee acted as a co-operative society on behalf of its members as per section 10 (of Income Tax Act, 1961) of Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) and had no right to sell any units and hence did not realize any gains from the alleged sale of any units. On the basis of the above reasons by following his appellate order for AY 2012-13, the Ld. CIT(A) deleted the addition of Rs.3,49,23,699/- made by the AO. While deleting the above addition, the Ld. CIT(A) followed his order for the AY 2012-13, wherein he held that :

“It is clear that the assessment year 2012-13 in the case of SNCML was covered in the proceeding before the ITSC. The ITSC has already taxed the revenue from the project "Lodha Supremus" in the hand of SNCML as evident from the discussion in above paragraph. Thus, I am of the considered view that taxing the same income again in the hand of the Appellant will result into double taxation of the same income which is not permissible in view of the settled principle.

I also find force in the submission of the AR that the Appellant was used as a SPV by SNCML for construction of Lodha Supremus which is more like a co-operative society carrying out the work for and on behalf of its members out of the cost met by them. Therefore, the transactions entered into between the SNCML and Appellant are not sham transaction as alleged by the AO. Under such circumstances no profit could arise in the hand of SPV. Thus, I am of the view that the addition of profit made in the hand of the Appellant is unjustified; therefore, the addition made by the AO is deleted.”

5. Before us, the Ld. Departmental Representative (DR) submits that the assessee was constructing the building as a Contractor/Developer and it entered into the contribution with its shareholders i.e. SNCML an agreement dated 31.03.2011 whereby it was agreed that the assessee shall construct a building “Lodha Supremus” on the land owned by SNCML including godown right of assessee-company by way of shareholders contribution for which cost shall be borne by SNCML. Therefore, the Ld. DR submits that the addition of Rs.3,49,23,699/- made by the AO be restored.

On the other hand, the Ld. counsel for the assessee relies on the order of the Ld. CIT(A) and the order of the Tribunal dated 23.08.2018 in assessee’s own case for AY 2012-13 (ITA No. 377/Mum/2016).

6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

As mentioned earlier, the assessee is a wholly owned subsidiary of SNCML, who in turn is a wholly owned subsidiary of ABL. The SNCML owned two pieces of land near Lower Parel and over a period of time it ran into financial problem and was ordered by the Bombay High Court into liquidation. Therefore, ABL, a Lodha Group Company engaged in development of real estate, with a view to acquire and develop the land owned by SNCML, acquired all shares of SNCML and then SNCML became its wholly owned subsidiary company. On the land owned by SNCML, there was a godown. ABL entered into an agreement with Rangnath Soman which included demerging the godown rights to a new company on 18.01.2008. Subsequently, as mutually agreed between the parties, Rangnath Somani (for and on behalf of his assigns/beneficiary M/s Onkarmal & Company) vide an assignment and assumption agreement dated 03.11.2009 vested all benefits, rights and interest under the said godown to the assessee for a lump sum consideration of Rs.3.25 crores. Thus SNCML was the owner of the land, only a right was assigned in favour of the assessee. Thereafter, the assessee and SNCML entered into a contribution agreement dated 31.03.2011 whereby it was agreed that the assessee shall construct a building “Lodha Supremus” on the land owned by SNCML for which cost shall be borne by SNCML by way of shareholders contribution. The amended ‘Articles of Association’ of the assessee inter alia provided for granting right to use and occupy the units in the project to its shareholders. Thus, the right to use and occupy the units in “Lodha Supremus” is inextricably linked to its shares/shareholders.

It was also agreed that SNCML would sell the shares of the assessee which would entitle the buyer of the shares to possess and occupy the designated constructed area. The sale proceeds of shares of the assessee shall be accounted as business receipts by the SNCML. In view of the above arrangement, the assessee-company was left with no right to occupy or sale or lease or deal in any manner with the units of “Lodha Supremus” as their rights were attached to the shares of the assessee-company and total shareholding of the assessee was with SNCML. Hence, SNCML being holder of the shares of the assessee, carrying right to premises, had entered into an agreement with the third party buyers for transfer of equity shares as a result of which occupancy rights in the units in “Lodha Supremus” was transferred. During the FY 2010-11, the SNCML has recorded a sales consideration of Rs.32,81,74,835/-. Thus in absence of transfer of units in “Lodha Supremus”,neither a sale can be recorded in the books of the assessee nor any income can be said to have arises in the hands of the assessee and consequently no income can be brought to tax in the hands of the assessee.

It is relevant to mention here that the above issue which also arose in AY 2012-13 has been decided in favour of the assessee by the ITAT ‘H’ Bench, Mumbai in assessee’s own case in ITA No. 377/Mum/2016, which reads as under :

“After having gone through the orders passed by revenue authorities, we find that Ld. CIT(A) while deciding these issues has taken into consideration the facts of the present case that the income taxed by the AO in the assessee’s hand has already assessed and taxed in the hand of SNCML, therefore taxing the same again in the hand of the assessee will result into double taxation of the said income. While reaching to the conclusion, Ld. CIT(A) appreciated the facts from the audited financial statements and orders passed by Income Tax Settlement Commission (ITSC u/s 245D(4) (of Income Tax Act, 1961). We have also gone through the elaborated findings recorded to the effect that assessee was used as a SPV (Special Purpose Vehicle) by SNCML for the construction of ‘Lodha Supremus’, which is more likely a Cooperative Society carrying out work for and on behalf of its members out of the cost met by them and no profit could arise in the hands of SPV. Thus, the additions were rightly deleted by Ld. CIT(A).

Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). Therefore,there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT(A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these grounds raised by the revenue stands dismissed.”

In view of the above factual scenario we affirm the order of the Ld. CIT(A). Thus the 1st to 6th ground of appeal are dismissed.

7. The 7th ground of appeal On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs.2,20,59,167/- on account 8% profit not treating as Contractor without appreciating the fact mentioned in agreement for contribution towards contribution cost dated 31.03.2011 and the reasons given by AO vide para 10.4 of the Assessment Order.

8. The above ground of appeal deals with the action of the AO taxing presumptively at 8% of the cost of construction of the project “Lodha Supremus”, treating the assessee as a contractor for the said project. The Ld. CIT(A) allowed the appeal filed by the assessee on the following reasons :

“The AR has drawn my attention to paras 5, 6 and 7 of the written submissions dated 8.5.2017 and submits that as upheld by the CIT(A) for AY 2012-13, the appellant was precluded from earning any profit from the said project, whether from sale of units or by any other manner including an alleged contractual income.

There was no such agreement between the appellant, SNCML and the members (shareholders) who were allotted the units that the appellant will act as a contractor and shall be allowed any income in that capacity. I therefore allow this ground No. 12.”

9. Before us, the Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel for the assessee relies on the order passed by the Ld. CIT(A).

10. We have heard the rival submissions and perused the relevant materials on record. In the instant case the AO presumed that the assessee acted as a contractor and estimated profit @ 8% of cost. There is nothing on record that the assessee acted as a “work contractor” on behalf of SNCML to construct the building. The contribution agreement referred to by the AO is nothing but assigning the supervision of the construction to the assessee by SNCML as per section 10 (of Income Tax Act, 1961) of MOFA. The said agreement unlike that of any work contract,does not assign any contractual profit or commission to the assessee-company. The assessee received contribution from the prospective unit buyers. The said contribution is entirely taken into account by SNCML for determining profit from the project. It offered the entire profit to tax. The said profit has been taxed in the hands of SNCML (assessee’s holding company) even by the Income Tax Settlement Commission (ITSC). No part of the profit has been assigned to the assessee. Further, the computation of the cost of the project does not include any payment made the assessee as a contractor. Thus, the presumption of the AO that the assessee acted as a ‘work contractor’ and thus earned profit is clearly contrary to the facts.

In view of the above factual scenario, we uphold the order of the Ld. CIT(A) and dismiss the 7th ground of appeal.

11. There is an additional ground of appeal (8th in AY 2013-14 and 9th in AY 2014-15) which reads as under for AY 2013-14 :

“On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs.12,83,41,400/- on account of capital gain ignoring the AO’s reasoning as per para 13.4, 13.5, 13.6 & 13.7 of the assessment order.”

12. The AO came to a finding during the course of assessment proceedings that the occupancy rights of godown has been converted from investment into stock-in-trade by the assessee in its books and has been sold along with sale of the constructed units, thereby invoking the provisions of section 45(2) (of Income Tax Act, 1961), he computed capital gains at Rs.12,83,41,400/-. While making the above addition u/s 45(2) (of Income Tax Act, 1961), the AO considered (i) the godown right held as capital asset was converted into stock-in-trade and (ii) the godown right was transferred proportionately along with sale of the units.

In appeal the Ld. CIT(A) held that there was no conversion of godown occupancy right to stock-in-trade and no sale of such stock-in-trade, since the assessee did not have the right to sale any units.

13. Before us, the Ld. DR supports the order passed by the AO, whereas the Ld. counsel relies on the order passed by the Ld. CIT(A).

14. We have heard the rival submissions and perused the relevant materials on record. In the instant case, the entire project land was owned by SNCML and it was merely the godown right which was assigned to the assessee- company. Further, even the cost of such godown right was assumed by SNCML in its estimated construction cost of project which is mentioned in para 4.1 of the “Agreement for Contribution towards Construction Cost” dated 31.03.2011. Thus the assessee was merely holding the godown right as an investment in its books of accounts, the cost of such right was in fact forming part of the project cost (Inventory) in the books of SNCML since the project “Lodha Supremus” was owned and developed by SNCML.

As per the accounts, the godown right of Rs.3,25,00,000/- was held as investment in the books of the assessee as on 31.03.2011 ; in the audited financials of FY 2011-12, the said investment in godown right was included within “capital work-in-progress” shown under the Schedule “fixed assets”. The application of section 45(2) (of Income Tax Act, 1961) is attracted only when there is a conversion of fixed assets into stock-in-trade which is not the case under consideration thereon.

Here, the assessee has no right to sell any unit, the godown right was embedded in the cost of the units developed which were sold by SNCML. Section 45(2) (of Income Tax Act, 1961) which relates to capital gain arising out of conversion of capital asset into stock-in-trade requires that in order to be chargeable to tax, there has to be a transfer u/s 2(47) (of Income Tax Act, 1961) and capital gain shall be brought to tax in the year in which the stock-in-trade has been sold.

Since, there is no conversion of capital asset into stock-in-trade and there is no transfer of such right by the assessee-company since it has not sold any units of “Lodha Supremus”, as all the sales is recognized and taxed in SNCML, there is no question of any taxability in the hands of the assessee.

Therefore, the above ground of appeal (8th ground of appeal for AY 2013-14 and 9th ground of appeal for AY 2014-15) is dismissed.

Fact being identical, our decision for the AY 2011-12 applies mutatis mutandis to AYs 2013-14 and 2014-15.

15. In the result, the appeals filed by the Revenue are dismissed.

Order pronounced in the open Court on 02/12/2020.

Sd/- Sd/-

(SAKTIJIT DEY) (N.K. PRADHAN)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai;

Dated: 02/12/2020