Karnataka High Court

The Pr Commissioner Of Income Tax vs M/S Cpc Logistics Ltd on 1 December, 2021

Bench: S.Sujatha, Hanchate Sanjeevkumar

     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 1ST DAY OF DECEMBER, 2021

                         PRESENT

           THE HON'BLE MRS.JUSTICE S.SUJATHA

                           AND

THE HON'BLE MR. JUSTICE HANCHATE SANJEEVKUMAR

          I.T.A.No.653/2016 c/w I.T.A.No.11/2017

IN I.T.A.No.653/2016:

BETWEEN :

1.      THE PR. COMMISSIONER OF
        INCOME TAX, C.R.BUILDINGS
        ATTAVARA, MANGALURU-575001

2.      THE ASST. COMMISSIONER OF
        INCOME TAX, CIRCLE-1(1)
        C.R.BUILDING, ATTAVARA
        MANGALURU-575001                      ...APPELLANTS

                 (BY SRI K.V.ARAVIND, ADV.)

AND :

M/s CPC LOGISTICS LTD.,
(FORMERLY KNOWN AS CPC (INDIA) LTD.)
191-B, BAIKAMPADY INDL. AREA,
MANGALURU
PAN: AAACT6579J                               ...RESPONDENT

             (BY SMT.SHEETAL BORKAR, ADV. FOR
                   SRI MALAHAR RAO, ADV.)

      THIS INCOME TAX APPEAL IS FILED UNDER SECTION
260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER
DATED 19.08.2016 PASSED IN ITA NO.1428/BANG/2014, FOR
                             -2-



THE ASSESSMENT YEAR 2006-2007 PRAYING TO 1.
FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED
ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS
PASSED     BY   THE      ITAT,  BENGALURU   IN   ITA
NO.1428/BANG/2014 DATED 19.08.2016 CONFIRMING THE
ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM
THE ORDER PASSED BY THE ASST. COMMISSIONER OF
INCOME TAX, CIRCLE-1(1), MANGALURU.


IN I.T.A.No.11/2017:

BETWEEN :

1.      THE PR. COMMISSIONER OF
        INCOME TAX, C.R.BUILDINGS
        ATTAVARA, MANGALURU-575001

2.      THE ASST. COMMISSIONER OF
        INCOME TAX, CIRCLE-2(1)
        C.R.BUILDING, ATTAVARA
        MANGALURU-575001                      ...APPELLANTS

                 (BY SRI K.V.ARAVIND, ADV.)

AND :

M/s SHANKAR VITTAL MOTOR CO. LTD.,
17-17-1306, SVMCO BUILDING
N.G.ROAD, ATTAVARA
MANGALURU - 575001
PAN: AAACT5176F                               ...RESPONDENT

(BY SRI A.SHANKAR, SENIOR COUNSEL A/W SRI M.LAVA, ADV.)

      THIS INCOME TAX APPEAL IS FILED UNDER SECTION
260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER
DATED 18.03.2016 PASSED IN ITA NO.35/BANG/2015, FOR THE
ASSESSMENT YEAR 2010-2011. PRAYING TO 1. FORMULATE
THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE.
2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED
BY THE ITAT, BENGALURU IN ITA NO.35/BANG/2015 DATED
18.03.2016 CONFIRMING THE ORDER OF THE APPELLATE
COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE
                           -3-



ASST. COMMISSIONER      OF   INCOME     TAX,     CIRCLE-2(1),
MANGALURU.

      THESE APPEALS COMING ON FOR HEARING, THIS DAY,
S. SUJATHA, J., DELIVERED THE FOLLOWING:


                    JUDGMENT

ITA No.11/2017 is filed by the Revenue under

Section 260A of the Income Tax Act, 1961 ('Act' for

short) challenging the order dated 18.03.2016 passed by

the Income Tax Appellate Tribunal, Bangalore Bench

"B", Bengaluru ('Tribunal' for short) in ITA

No.35/Bang/2015 relating to the Assessment Year

2010-11.

2. The respondent - assessee (ITA No.11/2017)

was the owner of a land measuring 3.20 acres situated

at Attavar village, Mangaluru. The assessee entered

into a Joint Development Agreement i.e., JDA with M/s

Mohtisham Complexes Pvt. Ltd., for construction of

residential apartment (Ivory Towers) and commercial

complexes (Ivory Enclave) on the said plot of land. The

assessee was entitled to receive 26% of the constructed

area as per the terms of the JDA. An addendum to this

JDA was made on 11.5.2009.

3. The assessing officer completed the

assessment by computing the long term capital gains,

quantifying the sale consideration as the cost of

construction of 26% of constructed area and allotted to

the assessee as per the JDA dated 11.5.2009 treating

the cost of construction as the full value of

consideration. Being aggrieved, the assessee preferred

an appeal before the Commissioner of Income Tax

(Appeals), which came to be allowed considering the

guidance value as the full value of consideration and on

further appeal before the Tribunal by the Revenue, the

same was confirmed dismissing the appeal. Hence, this

appeal by the Revenue.

4. ITA No.653/2016 is filed by the Revenue

under Section 260A of the Income Tax Act, 1961 ('Act'

for short) challenging the order dated 19.08.2016

passed by the Income Tax Appellate Tribunal, Bangalore

Bench "C", Bengaluru ('Tribunal' for short) in ITA

No.1428/Bang/2014 relating to the Assessment Year

2006-07.

5. The respondent - assessee (ITA

No.653/2016) claims to be a company involved in the

business of transport and had filed the return of income

for the period under consideration i.e., assessment year

2006-2007. The assessee - company had entered into a

Joint Development Agreement ('JDA' for short) with

Sri Ramesh Kumar on 31.8.2005 with respect to 4.4

acres of property situated at Kodihalli Village. As per

the terms of the said agreement, the assessee was

entitled to receive 25% of the built up area with

proportionate undivided share in common areas and

facilities. With respect to the said property, the

assessee entered into a sale deed with Sri Ramesh

Kumar and same was transferred for a consideration of

Rs.3.00 crores which was not reflected in the balance

sheet as it was not realized as claimed by the assessee.

Accordingly, proceedings under Section 147 of the Act

were initiated and an order came to be passed on

26.2.2014 treating the cost of construction as the full

value of consideration.

6. Being aggrieved, the assessee preferred an

appeal before the Commissioner of Income Tax

(Appeals), which came to be allowed thereby directing

the assessing authority to adopt the fair market value

based on the Government records as being

consideration. Aggrieved by the same, the Revenue

preferred an appeal before the Tribunal. The Tribunal

placing reliance on the decision in the case of ACIT v.

Shankar Vittal Motor Co.Ltd., in

ITA.No.35/Bang/2015, connected herein, dismissed

the appeal. Hence, the Revenue has preferred appeal in

ITA No.653/2016 against the order passed by the

Tribunal in ITA.No.1428/Bang/2014, which came to be

allowed considering the guidance value as the full value

of consideration.

7. These appeals were admitted by this Court

to consider the following common substantial question

of law;

"Whether on the facts and circumstances of the case, the Tribunal is right in holding that the guidance value is to be adopted as consideration for computing capital gain when the terms and conditions of the agreement specify the value of consideration to be received in the form of constructed area at 26% and when the provisions of section 48 specify the "full value of consideration" as received or accrued to the seller?"

8. Learned counsel appearing for the Revenue

argued that the Tribunal has grossly erred in holding

that the guidance value has to be adopted for

computing the capital gain when the terms and

conditions of the agreement specify the value of

consideration. Referring to Section 48 of the Act, it was

argued that "full value of consideration" has to be

interpreted with reference to cost of construction.

Section 50C was also referred to. It was agued that

Section 50D of the Act, which has come into effect from

1.4.2013 is not applicable to the facts of the present

case.

9. Learned Senior counsel representing the

respondent - assessee submitted that for the

assessment year under consideration, there is no

provision in the Act which contemplates as to how full

value of consideration has to be determined when an

assessee entered into a JDA. Placing reliance on CIT v.

B.C.Srinivasa Setty, reported in (1981) 128 ITR 294

(SC) submitted that there can be no capital gains arising

on entering into JDA during the assessment year under

consideration, as the Act does not contemplates the

method of computation of capital gains. Alternatively,

learned Senior Counsel submitted that the guidance

value of the extent of land which is transferred to the

developer, prevailing as on the date of transfer would be

deemed to be consideration accrued to the assessee as

on the date of the transfer. Referring to Section 50D of

the Act it was submitted that where the value of the

consideration is not ascertainable as on the date of the

transfer, as in the present case, the same market value

of the capital asset shall be deemed to be the full value

of consideration received or accruing as a result of such

transfer. This provision indicates that the same is

clarificatory in nature. Reliance was placed on CIT v.

Podar Cement (P) Ltd., reported in (1997) 226 ITR

625 (SC) and CIT v. Vatika Township (P) Ltd,

reported in (2014) 367 ITR 466 (SC). It is also argued

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that when the entire issue being revenue neutral, no

addition is required.

10. We have carefully considered the rival

submissions made by the learned counsel appearing for

the parties and perused the material on record.

11. Section 45 of the Act reads thus:

"Capital gains.

45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place."

Section 48 of the Act reads thus:

"Mode of computation.

48. The income chargeable under the head "Capital gains" shall be computed, by

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deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto;

(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in subsection (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:

Provided................"

12. On combined reading of these provisions,

any profits or gains arising from the transfer of a capital

asset with the exception as saved in Sections 54, 54B,

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54D, 54E, 54EA, 54EB, 54F, 54G and 54H shall be

chargeable to income tax under the head capital gains

and by legal fiction it is deemed to be the income of the

previous year in which the transfer took place. The

mode of computation as prescribed under Section 48

would indicate that the income chargeable under the

head capital gains shall be computed by deducting the

following amounts from the full value of consideration

received or accrued as a result of the transfer of the

capital asset. [1] expenditure incurred wholly or

exclusively in connection with such transfer [2] cost of

acquisition of the asset and the cost of any improvement

thereto. Special provision for full value of consideration

in certain cases is dealt by Section 50C which reads as

under:

"Special provision for full value of consideration in certain cases.

50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land

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or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided ....."

Section 50D of the Act reads thus;

"Fair market value deemed to be full value of consideration in certain cases.

50D. Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of

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transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer."

13. Now the main controversy revolves around

the determination of full value of consideration. The

expression 'full value of consideration' has been dealt by

the Hon'ble Supreme Court in the case of

Commissioner Of Income-Tax, West V/s. George

Henderson And Co. Ltd. [(1967) 66 ITR 622 (SC)] as

under:

"It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression "full consideration" in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only named

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the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred an parted with is itself the consideration for the transfer. The main part of section 12B(2) provides that the amount of a capital gain shall be computed after making certain deductions from the "full value of the consideration for which the sale, exchange or transfer of the capital asset is made". In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs.136 per share the full value of the consideration must be taken at the rate of Rs.136 per share. The view that we have

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expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the Income-tax Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are : (1) that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part

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of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer.

Fourthly, a related objection has been raised in Para 9 of your letter dated 02.06.2014. You have stated that, "full value of consideration cannot be construed as having a reference to the market value of the asset transferred.""

14. Learned counsel for the Revenue argued that

Section 50C is applicable where the consideration is

less than the guidance value and as such the same is

not applicable to the facts of the present case. Similarly,

Section 50D is also not applicable which has come into

force with effect from 01.04.2013; thus, cost of

construction would be the appropriate mode. However,

we are not inclined to accept the arguments of the

Revenue in entirety for the reason that the entire issue

is revenue neutral. The Tribunal has categorically

observed that "even otherwise, if any capital gains to be

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accrued in favour of assessee after receiving the

possession of the property, certainly that would also be

subject to capital gains." It is thus clear that in the

event the assessee were to dispose of the built up area,

on any part thereof, after receipt of the same from the

developer, it would have to necessarily pay tax on the

capital gains in the year of such sale and the cost of

such built up area to be reckoned for the purpose of

indexation which would be proportionate to the fair

market value of land. At this juncture, it would be

beneficial to refer to the judgment of the Hon'ble Apex

Court in the case of Commissioner of Income-tax V/s.

Excel Industries Ltd., [(2013) 358 ITR 295] wherein

the Hon'ble Apex Court has observed thus:

"32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and

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the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers."

Similarly, in the case of Commissioner of

Income-tax V/s. Bilahari Investment [P.]. Ltd., [(2008)

215 CTR 201 (SC)], the Hon'ble Apex Court has

observed thus:

"20. As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the

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same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court."

15. In the present case (ITA.No.11/2017),

Assessing Officer has adopted the rate of Rs.1250/-

per square feet merely based on the letter

given by the developer which is not supported with any

particulars. It cannot be ruled out the

possibility of the developer giving an inflated figure

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to suit his requirements in order to gain minimum tax

on his profits by inflating his costs. As such, the basis

for determination of full value of consideration by the

Assessing Officer based on the letter of the developer

cannot be appropriate. No doubt at the relevant period,

no provision was available in cases where the

consideration received or accruing as a result of transfer

of a capital asset by an assessee is not ascertainable.

Section 50D inserted by Finance Act, 2012 with effect

from 01.04.2013 would throw some light on the said

issue. As per the memorandum to Finance Bill, 2012,

the reasoning for inserting Section 50D of the Act is as

under:

           "Capital        gains   are        calculated    on
     transfer    of    a     capital     asset,     as     sale

consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the

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gains arising from the transfer of such assets is not taxable.

It is, therefore, proposed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration."

Even in terms of this provision, cost of

construction would not be the appropriate method to

arrive at the full market value of consideration.

16. In Seshasayee Steels [P.] Ltd., V/s.

Assistant Commissioner of Income Tax, Company

Circle VI[2], Chennai [(2020) 115 taxmann.com 5

(SC)] while considering the provision of Section 53 of the

TP Act in the context of capital gains under the Income

Tax Act, it has been held thus:

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"11. In order that the provisions of Section 53A of the T.P. Act be attracted, first and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof. Secondly, the transferee must have performed or be willing to perform his part of the agreement. It is only if these two important conditions, among others, are satisfied that the provisions of Section 53A can be said to be attracted on the facts of a given case.

12. On a reading of the agreement to sell dated 15.05.1998, what is clear is that both the parties are entitled to specific performance. (See Clause 14)

13. Clause 16 is crucial, and the expression used in Clause 16 is that the party of the first part hereby gives 'permission' to the party of the second part to start construction on the land.

14. Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of

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developing the land into flats and selling the same. Such license cannot be said to be 'possession' within the meaning of Section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, Section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone."

17. It was argued by the learned counsel for the

assessee that when the scheme of the Act does not

contemplate the method of computation, no capital

gains could be computed, placing reliance on

B.C.Srinivasa Setty supra. It appears to overcome this

aspect, a machinery provision has been introduced by

way of Section 50D of the Act. Though the said

provision has come into effect from 1.4.2013, it certainly

throws some light on the mode of computation under

Section 48 of the Act. In the circumstances, we are of

the considered opinion that the guidance value of the

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