13. [2020] 116 taxmann.com 898 (Mum.) ITO vs. Newtech (India) Developers ITA No. 3251/Mum/2018 A.Y.: 2009-10 Date of order: 27th May, 2020
Section 5 – When an assessee had an obligation to perform something and the assessee had not performed those obligations, nor does he even seem to be in a position to perform those obligations, a partial payment for fulfilling those obligations cannot be treated as income in the hands of the assessee
FACTS
The assessee, under the joint venture agreement entered into by it with Shivalik Ventures Pvt. Ltd., was to receive Rs. 5.40 crores on account of development rights from the joint venture and this payment was to be entirely funded by Shivalik Ventures Pvt. Ltd., the other participant in the joint venture. Out of this amount, the assessee was paid Rs. 86.40 lakhs at the time of entering into the joint venture agreement, Rs. 226.80 lakhs was to be paid on ‘obtaining IOA and commencement certificate’ by the joint venture, and Rs. 226.80 lakhs was to be paid upon ‘all the slum-dwellers vacating said property and shifting to alternate temporary transit accommodation.’
In terms of the arrangement the amount of Rs. 86.40 lakhs was to be treated as an advance until the point of time when at least 25% of the slum-dwellers occupying the said property vacated the premises. The agreement also provided that in case the assessee was unable to get at least 25% of the slum-dwellers occupying the said property to vacate the occupied property in five years, the entire money will have to be refunded to Shivalik Ventures Pvt. Ltd., though without any interest, within 60 days of the completion of the five years’ time limit. However, even till the time the re-assessment proceedings were going on, the assessee had not been able to get the occupants of the property to vacate it. In the financial statements, the amount of Rs. 86,40,000 received was reflected as advance received.
The assessee was of the view that no income has arisen in the hands of the assessee in respect of the above-mentioned transaction. However, the A.O. was of the view that under the mercantile method of accounting followed by the assessee, the transactions are recognised as and when they take place and under this method, the revenue is recorded when it is earned and the expenses are reported when they are incurred. He held that the assessee has already received an amount of Rs. 86,40,000 during the year and the balance amount will be received by him in instalments after the fulfilment of the conditions as mentioned in the agreement. As regards the agreement terms, the A.O. was of the view that since the stipulation about the payment being treated as an advance till at least 25% occupants have vacated the property was by way of a modification agreement, it was nothing but a colourable device to evade taxes.
The A.O., in an order passed u/s 147 r/w/s 143(3) of the Act, taxed the entire amount of Rs. 5,40,00,000 in the year under consideration.
Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the crux of the issue was whether income had accrued to the assessee. The basic concept is that the assessee should have acquired a right to receive the income. Drawing support from the decisions of the Tribunal in R & A Corporate Consultants India vs. ACIT (ITA No. 222/Hyd/2012) and K.K. Khullar vs. Deputy Commissioner of Income Tax – 2008 (1) TMI 447 – ITAT Delhi-I, the CIT(A) held that income can be considered to accrue or arise only when the assessee is able to evacuate 25% slum-dwellers as per the agreement / deed. If the assessee is unable to comply with this, the assessee will have to return the sum to Shivalik.
The Revenue was aggrieved by this and preferred an appeal to the Tribunal,
HELD
The Tribunal observed that –
i) the payment to be received by the assessee was for performance of its obligations under the joint venture agreement;
ii) when an assessee had an obligation to perform something and the assessee had not performed those obligations, nor did he even seem to be in a position to perform those obligations, it cannot be said that a partial payment for fulfilling the obligations can be treated as income in the hands of the assessee;
iii) it was a composite agreement and, irrespective of whether the modifications are looked at or not, all the terms of the agreement are to be read in conjunction with each other;
iv) what essentially flows from the decision of the Apex Court in E.D. Sassoon & Co. Ltd. vs. CT [(1954) 36 ITR 27 (SC)] is that a receipt cannot have an income character in the hands of the person who is still to perform the obligations, if the amount to be received is for performance of such obligations;
v) since the obligations of the assessee under the joint venture agreement are not yet performed, there cannot be any occasion to bring the consideration for performance of such obligations to tax;
vi) the very foundation of the impugned taxability is thus devoid of any legally sustainable basis.
As regards the supplementary agreement, it observed that even if the same were to be disregarded, income could accrue only on performance of obligations under the joint venture agreement. In any case, it cannot be open to the A.O. to disregard the supplementary, or modification whichever way one terms it, only because its result is clear and unambiguous negation of tax liability in the hands of the assessee. It also observed that whether the amount is actually refunded or not, nothing turns on that aspect either.
Under the terms of the joint venture agreement, the assessee was to receive the payment for performance of its obligations under the agreement and in view of the uncontroverted stand of the assessee that the obligations have not been performed till date, the Tribunal held that the income in question never accrued to the assessee.
The Tribunal held that the taxability of Rs. 5.40 crores, on account of what is alleged to be transfer of development rights, is wholly devoid of merits.
The appeal filed by the Revenue was dismissed.