1. This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-XIII, Bombay (Sri P.S. Kalsian) and pertains to the assessment year 1990-91.
The assessee is a partnership firm comprising of five partners. This firm was constituted by an Indenture of Partnership dated the 10th day of January, 1985. The business was said to have commenced from 28th January, 1984.
3. For the relevant assessment year, the assessee has down a loss computed under the head "business income" amounting to Rs. 91,12,980 and a profit under the head "capital gains" on the sale of land to Mahanagar Telephone Nigam Ltd. (hereinafter called "MTNL") amounting to Rs. 1,18,66,907. This amount was arrived at after claiming deduction under Section 48(2) of the Income-tax Act, 1961 (hereinafter called the "Act"). Thus the income disclosed for the year was under two heads, viz. business loss and the profit under the head capital gains. The net taxable income worked out by the assessee-firm was at Rs. 26,16,299.
4. Before the Assessing Officer, two questions were raised for his consideration : (i) Whether the assessee's claim that the land in question disposed of by the assessee is a capital asset and not a business asset, i.e., stock in trade? (ii) If the answer to Issue No. 1 is in the affirmative (it is the capital asset), then whether the assessee could bifurcate this sale consideration in respect of the capital asset into two parts - one in the nature of a capital receipt and the other in the nature of business receipts, thereby claiming deduction, under Section 48(2) and also business loss? 5. The Assessing Officer treated the entire receipt as a one composite receipt in respect of transfer of capital asset. Being aggrieved, the assessee preferred appeal before the CIT (Appeals). The CIT (Appeals) examined the nature of right in property by applying the various legal tenets and found that the receipt in question cannot be construed to be a 'capital receipt'; since it is not emanating out of the transfer of a capital asset. The entire income was treated by the CIT (Appeals) as the business income of the assessee.
6. The assessee received a sum of Rs. 4,66,56,233 from MTNL. This amount was bifurcated by the assessee into two parts, viz., Rs. 3,23,00,469 was treated as 'capital receipt' resulting from the transfer of land and the balance was treated as trading receipt. In doing so, the assessee had adopted the land valuation as done by the Director of Town Planning, who estimated the value at Rs. 900 per sq.
mtr. in respect of land in undeveloped condition and Rs. 1,300 per sq.
metre in developed condition.
7. The assessee paid a sum of Rs. 85,56,655 under agreement dated 28-1-1984 to Shri C.B. Sharma, in respect of the land admeasuring 52,925.27 sq. yards (equivalent to 44,261.09 sq. metres), at Powai, abutting Adi Sankaracharya Road.
8. Vide an agreement dated 6-3-1989 between the assessee, Shri Sharma, Bombay Metropolitan Regional Development Authority (hereinafter called "BMRDA") and MTNL the rights in the said property were transferred to MTNL for a total consideration of Rs. 1,300 per sq. metre, as fixed by the Director of Town Planning, Government of Maharashtra. The total area transferred to MTNL was 35,889.41 sq. metre. Taking the clue from the valuation report as done by the Director of Town Planning that the land in undeveloped condition will cost Rs. 900 per sq. metre, the assessee worked out the sale consideration of the land at Rs. 900 x 35,889.41 = 3,23,00,469. Business receipts were calculated at the rate of Rs. 400 per sq. metre. This amount of Rs. 400 is worked out on the basis of difference in the value of the land in undeveloped condition and developed condition. The Assessing Officer treated the entire receipt as a composite capital receipt and after allowing deduction under Section 48(2), the assessed the capital gains at Rs. 73,89,169.
The CIT (Appeals) treated the entire receipt as a composite business receipt and computed the income as under : Officer Rs. 2,33,11,240 Rs. 3,18,67,895 ----------------- ----------------- 9. Shri Anil Harish and Shri Piramal Shroff, Miss Swati & Shri Palraballa, the learned counsels for the assessee appeared before us.
Relevant documents and papers were filed at the time of hearing. It was submitted by Shri Harish that the assessee had acquired certain rights including the right to obtain conveyance, subject to the proceedings under various laws and these rights were confirmed and acted upon by the BMRDA and other authorities. Our attention was invited on agreement dated 18-1-1964. It was contended that by virtue of this agreement, the assessee acquired right to execute conveyance. This right was stated to be of the nature of capital asset. To support this contention, Shri Harish relied on the ratio laid down in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom.). It was further stated that the agreement was made perfectly in consonance with the canons of law and there is absolutely no illegality as to it. It was stated that the Bombay High Court was held in the case of Gopal C. Sharma v. CIT that when a property is subject to the acquisition proceedings the consideration received on the acquisition is to be taxed under the head 'capital gains'.
10. Assuming, without conceding Shri Harish stated that even if the transaction in question is illegal, it was acted upon and resulted income, the income is exigible to tax. The questions apropos the legality and enforceability of the agreement are, therefore, only academic. Indisputably no development work was carried on by the assessee before acquisition took place. The allocation as made by the assessee at Rs. 900 and Rs. 400 per sq. metre is based on sound reasonings. The revenue authorities were not fully correct in ascertaining the nature of receipt and treating the same as one composite receipt. Shri Harish neatly identified the areas of dispute and put the following two questions before us : (1) Whether the assessee could bifurcate this consideration into two parts - Rs. 900 per sq. metre in the nature of a capital receipt and Rs. 400 per sq. metre in the nature of business receipt (2) Whether the receipt of Rs. 900 per sq. metre arose from the transfer of capital asset or business asset 11. It was submitted that the consideration was received by the assessee from MTNL, a Public Sector Undertaking, the agreement dated 6-3-1989, clearly cognise the contents contained in agreement for development-cum-sale dated 28-1-1984, made between the assessee and Shri C.B. Sharma, wherein Shri Sharma agreed to sell, transfer and assign and the assessee agreed to purchase the property described in the First Schedule and accordingly made payments of Rs. 85,56,655 to Shri Sharma and in turn executed irrevocable Power of Attorney in favour of the assessee to represent him before various Government and Semi-Government Authorities to have the said property released from acquisition. Shri Sharma confirmed that the assessee was entitled to the rights and benefits arising under the tripartite agreement dated 19-11-1986 and nominated the assessee in his place and also authorised the assessee to develop the land and to deal with and assign all his rights and benefits in respect of the land to any third party and to recover and receive the amount of premium for consideration from the third party and to appropriate the same without being liable to account for the same to Mr. Sharma. Shri Sharma also executed Power of Attorney dated 15-8-1988 in favour of two of the partners of the assessee-firm.
12. It was stated that Form No. 37-I assigned by the assessee, Shri C.B. Sharma and BMRDA in favour of MTNL as Transferee. Shri C.B. Sharma by letter dated 15-8-1988, addressed to the assessee renewed the original agreement dated 28-1-1984 and confirmed that the assessee was entitled to the rights and benefits arising under the said tripartite agreement and that thereafter an agreement dated 6-3-1989 was entered into and the assessee and Shri C.B. Sharma have handed over to MTNL the possession of the land. The assessee was not released from its liabilities for development of infra-structure.
13. The learned counsel submitted that it is apparent from the perusal of the agreement dated 6-3-1989 and the Lease Deed dated 27-4-1989 that BMRDA was fully aware of all the facts. BMRDA was the authority to administer the law under the BMRD Act and ULCR Act. It has not taken into account any illegality in the transaction. No adverse comments were made. It recognizes the status of the assessee. The assessee was held to be entitled for the consideration. Therefore, the legal rights of the assessee were duly recognized by the authorities in question. In these circumstances no question can be raised as to the validity of the agreement dated 28-1-1984.
14. The learned counsel placed reliance on the decision of the Tribunal reported in the case of Mrs. Malini Ramnath Rele v. Third ITO [1994] 49 ITD 43 (Bom.)(TM), where a person sold a capital asset and received a consideration partly by cheque and partly in cash, the cash was lying at the house. It was recovered in a search and seizure action. The revenue taxed it under the head 'income from other sources'. There was difference of opinion between the Members of the Tribunal as to in which head it is to be taxed. The Third Member held that this amount is to be taxed under the head 'capital gains'.
15. Adverting to the provisions of Section 19 of the Bombay Rent (Control) Act, it was stated that if a person surrenders his tenancy rights for a consideration - both the giver and the taker are liable to be prosecuted and the term of imprisonment could be as much as two years. Despite income accruing from such transaction is exigible to tax. The question that remains is in what manner such income is to be taxed.
16. Admittedly the property was acquired by the Government. This fact finds mention in the agreement. The assessee made no attempt to defraud any authority. No provision of law was defeated. Shri Sharma was the registered land holder and he continued to be so. He was in possession of the land. As per the terms of the agreement possession was handed over to the assessee. The assessee was quarrying on the said land, the agreement was not forbidden by law. It is not falling within the ambit of Section 23 of the Indian Contract Act, 1872. Shri Harish further relied on the decision of the Apex Court rendered in the case of Satappa v. Appaya AIR 1968 SC 358 (sic) wherein it was held that "an agreement to sell land does not under the Transfer of Property Act create any interest in the land in the purchaser. By agreeing to purchase land, a person cannot be said in law to hold that land....
Coming to the facts of the present case, it was stated that there is nothing in the agreement nor can it be implied from the circumstances that it was the object of the parties that the provisions of the Act relating to the ceiling should be transgressed. Assessee acquired valuable rights in the said land. When MTNL decided to take it over it had a choice to pay Rs. 900 per sq. metre and develop the infrastructure itself or to pay Rs. 1,300 per sq. metre and to have developed the latter course. The development work began thereafter. The expenditure incurred was not for improvement of the asset but for the work to be done after the date of transfer. Shri Harish also relied on the decision of the Tribunal rendered in the case of Bombay Dyeing & Mfg. Co. Ltd. [] 3 ITD 512 [sic), a copy of which was given at page 246 of the paper book.
17. Without prejudice to the aforesaid contention, Shri Harish submitted that the CIT (Appeals) has erred in questioning the justification and the validity of the expenses of Rs. 47,28,554 claimed by the assessee. The CIT (Appeals) held that these expenses need not be fully allowed. The assessee furnished the details of the expenditure.
These were incurred on construction, security, etc. The CIT (Appeals) observed that these expenses, prima facie, not admissible because these were not incurred during the relevant accounting year. There is nothing in record to show that liability for incurring such expenditure arose during the relevant period. According to Shri Harish, the CIT (Appeals) should have accepted this expenditure as cost of the improvement of asset.
18. Shri Tilakchand, learned Senior Departmental Representative and Shri D.K. Singh, learned Departmental Representative appeared before us. Relevant documents and papers were filed at the time of hearing.
Shri Tilakchand invited our attention on the agreement dated 28-1-1984.
This agreement is in the form of a letter. It was entered into for development in respect of those pieces or parcels of land or the ground situated, lying and being at Village Tirandas bearing Survey No. 1 (Part) Survey No. 3, Survey No. 4, CTS No. 18 (part), 25 (part), 26 (part), 28, 29, 30 & 31 (part) and admeasuring 52925.26 sq. yards, equivalent to 44261.09 sq. metres, in registration District and sub-district of Bombay City and Bombay suburban and abutting Adi Shankaracharya Road, Powai. The dominant intent as demonstrated in the letter was to develop the property. The mere mentioning in the agreement that ultimately the property will be sold to the assessee is of no consequence. The assessee was restrained under the provisions of Land Ceiling Act to alienate the property. Agreement for transfer of acquired land is void ab-initio. The letter was written on a Stamp Paper of Rs. 5 and was addressed to M/s. Alpha Associates. The confirmation was made on behalf of M/s. Alpha Enterprises. The name and designation of the confirmatory party is not stated on the letter. In what capacity the acceptance was made is also not known. If M/s. Alpha Associates was a partnership firm at the relevant point of time, it was necessary to explain in the constitution. Otherwise it was not possible to cognize the consenting parties to the agreement. Admittedly, the Deed of Partnership firm was made on 10th January, 1985. This is made on two stamp papers of fifty rupees each purchased in the name of M. B.Agrawal & Co. one is dated 10-1-1985 and the other is dated 9-1-1985.
In clause 3 of the Indenture, it is stated that the partnership firm hereby constituted shall be deemed to be commenced from 28th January, 1984. In clause 6, it is laid down that the business of the partnership shall continue to be carried on the business of quarrying, contractors, constructions, dealing in all types of materials, traders, stockists, import, export of all the commodities and /or to act as agents, to act as representatives of manufacturers and to do such other business which the partners may mutually agree upon from time to time. In clause 7, it is stated that the capital of the partnership business shall continue to be contributed by the partners according to the requirements of the partnership business in such proportion as may be mutually agreed upon by and between the partners from time to time.
19. Coming to the aspect of capital contribution, it was pointed out that none of the partner introduced any capital in the beginning. As per balance sheet dated 30-6-1984, a sum of Rs. 11 lacs was advanced to Shri C.B. Sharma. This was reflected in the balance sheet with narration towards the purchase of property. In the liability side two loan accounts appear which are as under : 20. Transfer in respect of the said property was not possible.
Attention was invited on the provisions of Urban Land Ceiling Act, BMRD Act. Legally, it was not possible to acquire the ownership right or any ancillary right connected with the ownership of the property. The assessee was appointed to develop the property. His status was akin to that of a licencee. He was allowed right to possession for developing the property only. The learned Departmental Representative exemplified this. He said that if someone is entrusted to perform the white washing and colouring of the premises for discharging the duties he will be required to give access to the premises. In consequence thereof he gets right to enter the premises. By possessing the premises for performing the colouring and white washing he does not get on this count any alienable legal right. The nature of such right is limited. It is confined to the performance of task entrusted to the licensee. Its scope cannot be extended further. The right of the assessee in the said land was not superior to that of the said right. The right is a legally protected interest. Therefore the so-called right which the assessee alleges to acquire is to be viewed in the correct perspective.
21. In the agreement dated 19-11-1986 entered into between the Government of Maharashtra, BMRDA and Shri C.B. Sharma and Shri Harishchandra Sharma, Chandrabhan Sharma and others, assessee's right was not defined and described. It was not cognised. The assessee was only granted a licence to develop the land. In order to facilitate the developmental activity an agreement dated 15-8-1988 was entered into between H.C. Sharma and C.B. Sharma and the assessee-firm and Power of Attorney dated 15-8-1988 was given by Shri Sharma to two partners of the firm. In agreement dated 6-3-1989 between the assessee, Shri Sharma and others and BMRDA and MTNL, it is clearly stated that prior to 12-5-1983, Shri C.B. Sharma was the owner of the land. It shows that after that date Shri Sharma ceased to be the owner of the said land. It is an axiom enunciated in a well known legal dictum- He who hath not, cannot give. That is no one can give better title than what he himself has. The learned Departmental Representative further relied on the ratio laid down in the case of CIT v. R. Dalmia [1987] 163 ITR 517 (Delhi) and CIT v. J. Dalmia [1984] 149 ITR 215 (Delhi).
22. In regard to the allowability of expenditure of Rs. 47,28,554, it was submitted that there is no evidence that these expenditures were incurred during the relevant accounting year. Therefore, these expenditures cannot be allowed.
23. We have heard the rival submissions, in the light of the material placed before us and precedents relied upon. It was alleged that in consideration of a sum of Rs. 85,56,655, some valuable rights in the property were alienated to the assessee-firm. The mere fact that the property was acquired by the Government is not enough to put a total clog on the rights of the transferor. In order to effect a transfer of capital asset under the Income-tax Act, 1961, it is not necessary that only the ownership rights be transferred. The connotation of the words 'capital asset' is wide enough to include within its ambit, possessory rights and other residuary rights also which Shri Sharma transferred to the assessee. These rights were acquired for a consideration. Assessee bifurcated the nature of rights. Some were connected with the capital asset. Others were in relation to the business activities. These activities include development work on the said property.
24. Apparently, notification apropos the acquisition put a clog on the rights of Shri Sharma. There was a legal mandate as to the transfer of rights. In jurisprudence the ownership is understood as right over a determinate thing indefinite in point of user, unlimited point of duration and unrestricted in point and disposition. There are certain other rights also which in legal parlance are known by the name - "jura in re aliena" that is right in the property of others. These rights are different from the right of licencee. It was alleged on behalf of the assessee that right as to the ownership was dormant in the wake of acquisition proceedings. It was right at rest. There was every possibility of its being put into motion. Contemplating such eventuality the agreement was entered into. The assessee alleged to have purchased those dormant rights which were waiting for activation.
25. We have perused the contents of the agreement dated 28-1-1984. It is true that there is mention in regard to the transfer of the property, but the dominant intent as demonstrated in the agreement was in regard to the development of the property. Shri Sharma was no longer the owner of the said property. The property was acquired by the Government. It was not possible on the part of Shri Sharma to confer the proprietary rights in the said property for consideration. At the given point of time Shri Sharma has only the right to receive compensation from the Government. He was interested in guarding his interest and to encash whatever was possible. In this background the deal was finalised. Funds were gathered and first instalment of Rs. 11 lacs was paid to Shri Sharma. This money was paid out of the funds collected from Hiranandani Builders and Apex Constructions. The partnership was witnesseth by an instrument of partnership dated 10-1-1985. The issue apropos the legality of partnership is not before us; but we are concerned with the intent of the partners to understand the exact nature of rights conferred on assessee. The agreement was acted upon. Parties are not disputing its enforceability or legality.
Therefore, it would be futile to drag it into the labyrinth of law.
There can be oral agreements. There can be oral partnership. We now proceed to examine the fact in the scenario of the surrounding circumstances. It is abundantly clear from the material gathered and presented on record that intent of the assessee was to develop the land and to derive gain out of developmental activities. As a prudent man, he calculated the risk. Framed the scheme and deployed the funds. The purpose was indeed to earn profit. Partnership was formed, at a later date. Carrying business is one of the essential ingredient of the partnership. Partnership is defined in the Partnership Act, 1932, as relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The very fact that partnership was formed goes to show that partners had intent to carry business. In business, firm can no doubt hold capital asset.
We now propose to discuss the meaning of word 'capital asset'.
'Capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- (i) any stock-in-trade consumable stores or raw-materials held for the purpose of his business or profession; 26. The property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others. He is entitled to use and enjoy it as he pleases provided he does not infringe any law of the State. In its normal connotation "property" means the highest right a man have to anything, being that right which one has to lands or tenements, goods or chattels which does not depend on another's courtesy; it includes ownership, estates and interests in corporeal things and also rights such as trade-marks, copy-rights, patents and even rights in personam capable of transfer or transmission, such as debts; and signifies a beneficial right to or a thing considered as having a money value, especially with reference to transfer or succession, and to their capacity of being injured. The implication of the word "held by an assessee" in these definition provisions include physical, actual, constructive and symbolic possession of a property of any kind. The word 'property' refers to those well recognised types of interest which have the insignia of character of proprietary rights.
The right to obtain conveyance of an immovable property held to be a capital asset in the case of Tata Services Ltd. (supra). In the present case we find that the assessee did not get such right from Shri Sharma because such rights were not vested even in Mr. Sharma. The general principle is that where property is sold by a person who is not the owner, and who does not sell under the authority or with the consent of the owner, the buyer acquires no better title to the property than the seller had. This principle is canonized in the well known dictum : Shri Sharma was only a custodian of the property. He had a right only to get compensation from the Government in regard to the said property.
He was not the owner of the property. In the legal sense by a tripartite agreement dated 19-11-1986 between the Governor of Maharashtra, BMRDA and Shri Sharma and others, Shri Sharma was granted a lease in respect of the said property for a term of 80 years with effect from 19-11-1986. This lease was granted with a specific purpose.
The rights of the assessee-firm did not get any cognition in such lease. Pursuant to such lease agreement, Shri Sharma was not capable to execute any conveyance in favour of the assessee. Shri Sharma was obliged vide clause 7 of the said agreement to develop the land in accordance with the provisions of the Bombay Municipal Corporation Act, 1988 and Maharashtra State Town Planning Act, 1966. It was agreed vide clause 7(3) that the land-owner will offer to the Central Government to grant sub-lease or sub-leases of the land. It was not open to Shri Sharma to divest right in the said land as per his own choice.
Therefore, there was no possibility of executing any conveyance in favour of the assessee. He had right to develop the property in accordance with the terms laid down in the lease deed. Therefore, the only thing possible for Shri Sharma was to transfer the right to develop the said land which he did. Vide the Sale Agreement dated 6-3-1989 between the assessee, Shri Sharma, BMRDA and MTNL, the rights in the said property were transferred by the assessee to MTNL for a total consideration of Rs. 1,300 per sq. metre as fixed by the Director of Town Planning, Government of Maharashtra. As a result thereof, the assessee received Rs. 4,66,56,233 from MTNL.
27. In the case of J. Dalmia (supra) it was held that the right to acquire an agreement to sell is not a proprietary right and hence, it is not a capital asset. Consequently, the receipts attributable to such right is not assessable to capital asset. This decision was followed by the Delhi High Court in the case of R. Dalmia (supra).
28. In the present case, we find that the assessee got the right only to develop the property. The other rights, such as right to possession, etc., were all incidental, and object of the conferment of those rights were to facilitate the performance of developmental activities. Only right to develop the property gets due cognizance in the agreement by virtue of which assessee received Rs. 4,66,56,233.
29. We find that assessee is mainly in the construction business. The dominant object of the assessee-firm was to earn profit from the land development activities. Having regard to the facts discussed hereinbefore we are of the opinion that it is not open for the assessee to bifurcate the consideration into two parts - Rs. 900 per sq. metre in the nature of a capital receipt and Rs. 400 per sq. metre in the nature of business receipt. The entire amount of consideration was a composite business receipt. Accordingly, we uphold the impugned order on this count.
30. In regard to the allowability of expenditure of Rs. 47,28,554, we find that the Assessing Officer has not considered these expenditures in the right perspective. All he got to see is that whether such expenditures were incurred in the interest of business and can be allowed as a business expenditure in accordance with law. This issue, in our opinion, needs to be examined afresh. We, therefore, set aside the impugned order on this count and restore this issue to the file of the Assessing Officer with direction to examine the allowability of this expenditure in accordance with law.
31. The other grounds were not pressed at the time of hearing. We dismiss the same as not pressed.