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

13. [2020] 116
taxmann.com 898 (Mum.) ITO vs. Newtech
(India) Developers ITA No.
3251/Mum/2018 A.Y.: 2009-10 Date of order: 27^th
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.