1.Aforesaid appeals one by the department and two by assessee are directed against separate orders of ld. CIT(A)-II, Hyderabad for the AYs 2002-03, 2005-06 and 2006-07. Assessee has also filed C.O. against the order of ld. CIT(A) for AY 2002-03. As the appeals filed are on common issues and relate to same assessee, they are clubbed and heard together, therefore, these appeals are being disposed of by way of this consolidated order for the sake of convenience.
ITA No. 256/Hyd/2006
2.This appeal by the department is directed against the order dated 30/12/2005 passed by ld. CIT(A)-II. There is a delay of three days in filing the appeal. A petition has been filed explaining the cause of delay and seeking condonation for the same. On perusing the reason shown for delay, we are satisfied with the same and condone the delay of 3 days and admit the appeal for hearing on merit.
3.The only issue raised by the department in this appeal is in relation to the decision of ld. CIT(A) in deleting the addition made by AO on account of capital gain.
4.Briefly the facts relating to this issue are, assessee is a state public sector undertaking and is in the business of land leveling, hiring and sales of tractors. For the AY under consideration, assessee filed its return of income declaring 'nil' income after setting off brought forward losses of Rs. 2,38,74,504. Subsequently, assessee filed a revised return on 01/11/2003 declaring 'nil' income after setting off brought forward loss of Rs. 10,36,36,461. During the assessment proceeding, AO noticed that initially assessee had shown an amount of Rs. 19,70,83,862 as total sale consideration from the property situated at Nalgonda, Warangal and Hyderabad and worked out long term capital gain at Rs. 19,53,14,791. However, in the foot note to the computation of income, it was stated by assessee that no capital gain arose during the relevant PY in respect of the land at 10-2-3, AC Guards, Hyderabad as it was not through a registered conveyance deed and there was no transfer within the meaning of section 2(47)(v) of the Act. During assessment proceeding, assessee also filed a revised computation of income working out the long term capital gain at Rs. 1,16,33,336 after excluding capital gain shown earlier in respect of the property at AC Guards, Hyderabad. AO issued show cause notice calling upon assessee to explain why the capital gain earlier shown with regard to the property sold at AC Guards, Hyderabad should not be taxed in the impugned AY. In reply to the show cause notice, it was submitted by assessee as under:
"1. In view of some arrangement between the State Govt. and the income tax department, the state govt. directed the assessee corporation vide G.O. Ms. No. 33, dt. 03/07/2011 to hand over possession to the income tax department.
2. The value of the land transferred was to be determined by the state govt. and set-off against loans payable by the corporation to the state govt. The same was not finalized till date. Some value was determined for book entry purposes but was yet to be formally approved by the state govt. Only after the consideration receivable is finally determined and the state govt. finalises the legal formalities of transfer of land with the income tax department, transfer could be said to be complete.
3. For the purposes of the part performance under the Transfer of Property Act, there should be a written contract between transferor and transferee for transfer of an immovable property. However, no such contract existed between the assessee corporation and the income tax department.
4. Entries made in the books of account of assessee corporation with respect to the transfer have no relevance until the transfer is completed in all the above respects."
AO after examining the submissions made by assessee, noted that in the original return, assessee has not disclosed any capital gain on the property situated at AC Guards, Hyd. However, in the revised return, even though, assessee mentioned that sale was not complete, but, still it offered sale consideration as income in the P&L A/c. Accordingly, depreciation statement was prepared deleting the property at AC Guards, Hyd. from the list of fixed assets. Thus, it was observed by AO only on an after thought that the total income will increase to the extent that it cannot be set off against brought forward losses, which may subsequently result in tax, assessee has sought to withdraw long term capital gain on the property at AC Guards. AO also observed that in the returns for 2003-04 and 2004-05, assessee has not offered capital gain in respect of the property at AC Guards. AO observed, though, as per assessee's submission it will appear that it has transferred land to the income-tax department, but, actually assessee has transferred the land to the State Government, for a consideration equivalent to the loans to be paid by it to the govt. of AP. AO referring to the GOMS No. 33 dated 03/07/2001 of state govt. for handing over possession of the property to the income-tax department, observed that the Act of the state govt. passing G.O. transferring land to a third party indicates that state govt. has taken over ownership/possession of the land. As far as consideration was concerned, the said G.O. also makes it clear that necessary orders in respect of the cost of land and its adjustment against loan amount payable by assessee to the govt. would be issued separately. Thus, AO observed that assessee's argument that neither consideration was determined nor transfer took place u/s 2(47)(v) is acceptable. AO referring to section 2(47)(v) of the Act, stated that as per the said provision transfer of the property has in fact taken place. AO further opined that assessee corporation has itself removed the land from its balance sheet as on 31/03/2002, which indicates transfer of land to the state govt. AO observed, even assessee has handed over the possession of property in compliance to the GO issued by the state government. On the basis of the aforesaid facts, AO observed that transfer of property has taken place and only adjustment entry has to be passed in respect of land towards loan amount payable to govt. of AP, therefore, the consideration in a sense has been received in advance by assessee corporation. On the aforesaid basis, AO proceeded to compute long term capital gain from sale of property at Rs. 19,53,14,291 as shown by assessee in the revised return. Being aggrieved of determination of capital gain as above, assessee preferred appeal before ld. CIT(A).
5. In course of hearing of appeal, assessee advanced elaborate arguments in support of its contention that neither there is transfer of property in terms of section 2(47(v) as a result of which long term capital gain accrued to assessee during relevant PY. It was submitted by assessee that, though, AO has put much emphasis on the entries made in the books of account, but, they are not determinative of a receipt or its assessability as income. It was submitted that the govt. order itself would reveal that necessary orders in respect of cost of land and its adjustment against loan amount will be issued separately. Therefore, when cost of land itself is not determined, computation provision would fail in view of the principle laid down by the Hon'ble Supreme Court in case of CIT v. B.C. Srinivasa Setty 128 ITR 294/5 Taxman 1. It was submitted by assessee that even AO's conclusion that there is a transfer in terms of section 2(47(v) is without any basis as there is no contract between assessee and the state govt. of the nature envisaged in section 53A of the Transfer of Properties Act.
6. Ld. CIT(A) after considering the submissions of assessee in the context of facts and materials on record found that as per GOMS No. 33 dated 03/07/01 issued by the govt., assessee was directed to hand over possession of the property to the income-tax department and in compliance to the government's order, assessee handed over possession of the property to the income-tax department on 31/10/2001. Ld. CIT(A) observed that till possession of the property was handed over by virtue of the govt.'s order, assessee was the owner of the property. However, the income-tax department in exchange of land owned by it at some other place secured the said property from the govt. Thus, the transaction involving the property in question was between assessee and the govt. and the Govt. in its order has intended to issue a separate order in respect of the cost of property and adjust the same against the loan borrowed by assessee. He observed, though, govt. till the date of hearing of appeal has not issued any order fixing the cost of property, but, AO has proceeded to compute capital gain only on the ground that assessee had handed over the possession of the said property. Ld. CIT(A) after going through the provision of section 2(47)(v) of the Act, observed that as per the said provision any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 is to be treated as transfer. Keeping in view aforesaid provision, ld. CIT(A) while examining the facts of the case found that though property in question was handed over by assessee to income tax department as per the govt. order, but, there is no contract of the nature referred to u/s 53A of the Transfer of Properties Act between assessee and the state govt. Therefore, provisions of section 2(47(v) are not applicable. As far as the allegation of AO that assessee has credited market value of the said property to P&L A/c, ld. CIT(A) observed that mere entry made by assessee unilaterally in the books of account, pending approval of the govt. cannot be taken as full value of consideration within the meaning of section 48 of the Act. He, therefore, concluded that in view of the specific order of the govt. providing for determination of cost of land through a separate order, crediting the market value by assessee in its accounts will have no relevance and assessee cannot be tied down to such wrong entry made in the books of account. In this context, he relied upon a decision of Hon'ble Supreme Court in case of Alapati Venkataramiah v. CIT  57 ITR 185 He, therefore, held that crediting of market value by assessee in absence of any order passed by govt. determining the cost of property cannot be taken into consideration. On the aforesaid basis, ld. CIT(A) held that long term capital gain computed by AO in the impugned AY cannot survive, hence, addition made was deleted. However, ld. CIT(A) directed assessee to discharge its obligation of payment of capital gain tax as and when it arises or accrues by after govt. passes necessary orders in respect of the cost of the said property.
7. Ld. DR strongly supporting the reasoning of the AO submitted before us, once possession is handed over by assessee of the immovable property, there is a transfer in terms of section 2(47)(v) of the Act irrespective of fact whether there is a written contract or not. Ld. DR submitted, when the handing over of possession is not in dispute and further when assessee has credited market value of the property to P&L A/c and removed it from the list of fixed assets, transfer cannot be denied. In support of such contention, he relied upon the decision of Hon'ble AP High Court in case of Potla Nageswara Rao v.Dy. CIT  365 ITR 249/226 Taxman 173 (Mag.)/50 taxmann.com 137.
8. Ld. AR, on the other hand, submitted before us, under no circumstances, it can be treated as transfer u/s 2(47)(v) as the conditions of sections 53A of the T.P. Act has not been fulfilled. Ld. AR submitted, as per section 53A of TP Act, only a right is conferred on the transferee and in real sense of the term there is no transfer. He submitted, in the facts of the present case, as per the order issued by govt., assessee has handed over the possession of the property to the income tax department. There is no contract in writing between assessee and state govt. so as to treat it as transfer as envisaged u/s 53A of the T.P. Act. Ld. AR referring to the govt. order submitted, it is an unilateral act of the state govt. to hand over the land in question to the income tax department. However, though, in the said order, it has been mentioned that a separate order will be passed determining the cost of land and adjusting the same against repayment of loan by assessee to the state govt., but, till date no such order has been passed. Therefore, in absence of cost of land, computation provision itself fails, hence, there cannot be any capital gain for the impugned AY. Ld. AR submitted, neither assessee has effected any transfer nor any consideration has been received. It was submitted, even the market value of the land credited in the books of account has been shown as receivable and not adjusted against loan. In this context, he referred to the balance sheet and P&L a/c of assessee company. Further, he submitted, entries made in the books of account with regard to market value or removing the land from fixed assets are neither determinative nor conclusive factor for accrual of income so as to tax it in the hands of assessee. Ld. AR relying upon a decision of the Hon'ble Supreme Court in case of K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 submitted, what is not received or accrued cannot be considered as income of assessee. Alternatively, it was submitted by assessee, even if it is to be considered as transfer, then, it is akin to compulsory acquisition of land by govt. and in that event capital gain would be taxable in the year of receipt of compensation as per section 45(5) of the Act. As far as the decision of Potla Nageswara Rao case (supra) is concerned, ld. AR submitted, the facts of the said case are clearly distinguishable and will not apply to assessee's case.
9. We have considered the submissions of the parties and perused the materials on record as well as orders of revenue authorities. As can be seen, solely relying upon the fact that assessee has handed over possession of the property to the income-tax department in terms with the GOMS issued by govt., AO has inferred that there is a transfer in terms of section 2(47)(v) of the Act. Therefore, the fundamental issue which requires to be decided is whether there is a transfer of capital asset during the year in terms of section 2(47)(v) as alleged by AO. Before deciding the issue it is worthwhile to look into the provision of section 2(47)(v) which reads as under:
"2(47)(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 1 (4 of 1882);"
9.1 A plain reading of the aforesaid provision would make it clear that the words 'allowing the possession of any immovable property' cannot be read in isolation, but, has to be read in conjunction with the words ' to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882'. Therefore, it is all the more necessary to look into the provision of section 53A of the T.P. Act, 1882 which reads as under:
"53A. Part performance. - Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."
9.2 On carefully analyzing the aforesaid provision, it is very much clear, a contract in writing between the parties from which intention of the parties to transfer can be ascertained with reasonable certainty is a sine qua non for applying the provision of section 53A. Further, though, section 2(47)(v) recognizes delivery of possession in pursuance to a contract in the nature envisaged u/s 53A of T.P. Act, 1882 as deemed transfer for charging capital gain tax, but, section 53A of the T.P. Act, 1882 does not contemplate a transfer of immovable property by itself. What it provides is a legally enforceable right upon the transferee in respect of the ownership of the property provided transferee has performed or willing to perform his part of the contract.
9.3 If we consider the facts of the present case in the light of the statutory provisions referred to above, it could be seen that firstly there is no written contract, either between the assessee and state govt. or between assessee and Income-tax department, of the nature referred to in section 53A of the T.P. Act, 1882 from the terms of which transfer of immovable property can be ascertained with reasonable certainty. At least, existence of any such contract has not been brought to our notice by the ld. DR. Though, it is a fact that possession of the property has been handed over by assessee to the income tax department, but, the same is in compliance to the direction of the govt. vide GOMS No. 33 of 03/07/2011. Thus, it is patent and obvious, handing over possession of property by assessee to the income tax department is by virtue of an unilateral act of the state govt. over which assessee has neither any say nor any control but at the same time it has to comply to the same. In the aforesaid facts and circumstances, it cannot be said that the basic condition of section 53A of T.P. Act in the present case has been fulfilled. Moreover, consideration payable towards transfer has also not been quantified till date. Though, it is provided in GOMS that a separate order would be passed determining the cost of the property and adjusting the same towards loan payable by assessee to the state govt., but, as yet no such order has been passed by the state govt. In the aforesaid facts and circumstances, in absence of written contract, quantification of consideration to be paid, it cannot be said that there is a transfer in terms of section 2(47)(v) of the Act. As far as the decision of Potla Nageswara Rao (supra) is concerned, on careful analysis of the same, it is found that the same is factually distinguishable and will not apply to present case. In case of Potla Nageswara Rao (supra), assessee has entered into a development agreement and in terms with the development agreement, assessee has handed over possession of the property to the developer, whereas, in the present case there is no written agreement between the parties.
9.4 One more aspect, which needs consideration is, another reason for AO to conclude that capital gain has arisen is due to the fact that assessee has credited market value of the cost of land to P&L A/c and simultaneously removed the property in question from the list of fixed assets. In our view, entries made by assessee in the books of account are neither conclusive nor determinative factor to conclude accrual of real income at the hands of assessee. It is clear from the GOMS issued by govt. that the cost of land will be determined by the state govt. through a separate order. However, as yet no order has been passed by the govt. determining the cost of land. It is also evident from the statement of audited accounts of assessee, though, assessee has credited the market value of the property to P&L A/c, but, it has been shown as receivable and has not been adjusted against loan repayable to the state govt. In the aforesaid facts and circumstances, in our view, in absence of determination of cost of land by state govt., no capital gain can be computed in the impugned AY. Ld. CIT(A), in our view, is therefore justified in deleting the addition made by AO on account of long term capital gain.
9.5 However, before parting, it needs to be mentioned, there is no doubt that the land in question has been transferred to the income tax department, albeit, through an order of the state govt. The said order also provides that the govt. will determine the cost of land and adjust the same towards loan repayable by assessee to govt. From the aforesaid facts, it is clear that transfer of land was not out of assessee's own volition but at the instance of the state govt. Therefore, even assuming that there is a transfer but the same is akin to or similar in nature to transfer by way of compulsory acquisition as envisaged u/s 45(5) of the Act. That being the case, in terms with the said provision capital gain accrues only in the AY in which compensation/consideration is received, which in the present case would be the assessment year in which cost of land is determined by the state govt. and it is adjusted against the loan repayable by assessee. With the aforesaid observations, we uphold the order of ld. CIT(A) by dismissing the ground raised.
10. In the result, appeal of the department is dismissed.
C.O. No. 32/Hyd/06
11. The issue raised by assessee in C.O. is in relation to the direction of ld. CIT(A) with regard to the deduction claimed on payment of VRS.
12. Briefly, the facts relating to this issue are, during the assessment proceeding, AO noticed that assessee has claimed deduction on account of payment made towards Voluntary Retirement Scheme (VRS). He found that assessee while computing its profit has reduced an amount of Rs. 10,82,16,659 as prior period adjustment. When assessee was asked to show the reasons for not adding back prior period expenses, it was submitted by assessee that prior period adjustment was on account of VRS of employees. It was submitted by assessee that prior period expenditure relating to AYs 1997-98, 98-99 and 99-2000 on account of VRS is and are therefore required to be allowed in instalments, whereas, expenditure incurred on VRS for the impugned AY amounting to Rs. 3,47,59,447 is required to be allowed in full. AO, however, was not convinced with the submissions of assessee and held that prior period adjustment of Rs. 10,82,16,659 is not allowable. As far as the expenditure incurred towards VRS for the impugned AY is concerned, AO observed that only 1/5th of the amount claimed is allowable. Being aggrieved of the disallowance made, assessee preferred appeal before ld. CIT(A).
13. In course of appeal proceeding, it was submitted by assessee that as assessee has incurred expenditure towards VRS for the AYs 1997-98, 1998-99 and 2000-01 as well as for the current AY, such expenditure is to be amortized and allowable in five AYs commencing from AY following the PY in which it was first incurred in terms with the provisions contained u/s 35DDA of the Act. It was submitted by assessee, though it has debited the consolidated expenditure of Rs. 15,56,36,411 pertaining to all the assessment years to P&L A/c for AY 2002-03 and claimed Rs. 9,37,98,122 being 1/5th as deduction u/s 35DDA, but, AO has only considered the expenditure incurred during the relevant PY and allowed 1/5th out of the same while disallowing the expenditure relating to earlier AYs. Ld. CIT(A) after considering the submissions of assessee, decided the issue as under:
"5.2 The AR was heard and the appellant's written submissions duly considered. I find from the relevant part of the impugned order that there is no mention of the brought forward VRS-expenditure pertaining to the AYs: 1997-98, 98-99 and 2000-01. It is apparent that the appellant also appeared to have had not raised this issue during the course of the proceedings of the impugned order. Moreover, it is seen fro
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m the statement of computation of total income- enclosed to the revised return- that 1/5th expenses on exgratia paid on VRS has been claimed in a consolidated manner, without break-up of the same, reflecting inclusion of such claims of the said earlier AYs. Besides, the impugned order also does not indicate, if the appellant had had raised this issue before the AD. In the circumstances, the AD is directed to verify the said claim(s) by the appellant and allow as per relevant provisions of the Act. The appellant is also directed to furnish all necessary information in this behalf to the AO to ensure complete appreciation of the facts thereof. Thus, this ground of appeal is treated as allowed." 14. Ld. AR submitted before us, the direction of ld. CIT(A) amounts to setting aside the issue to AO, which he is not authorized to do as per the statute. He, therefore, submitted that matter may be remitted back to CIT(A) for deciding on merit. 15. Ld. DR has no objection if the matter is remitted to CIT(A) for deciding again. 16. Having considered the submissions of the parties and perused the materials on record, we are of the view that ld. CIT(A) instead of directing AO to verify assessee's claim and decide the issue, should himself have decided the issue as direction of ld. CIT(A) amounts to setting aside the assessment order, which he is not authorized to do under the statute. If at all ld. CIT(A) wanted to verify any factual aspect, he could have called for a remand report from AO and accordingly decided the issue himself. In the aforesaid view of the matter, we are inclined to set aside the order of ld. CIT(A) on the issue and remit the matter back to his file for deciding the issue afresh on merit after due opportunity of being heard to assessee. If necessary ld. CIT(A) may call for a remand report from AO before deciding the issue. 17. In the result, C.O. filed by assessee is allowed for statistical purposes. ITA Nos. 214 & 215/Hyd/2010 by assessee 17.1 The issue raised by assessee in its appeals is pertaining to deduction u/s 35DDA. Since the claim of assessee in these years are consequential to and dependent upon the decision to be taken by ld. CIT(A) on similar issue in AY 2002-03, we think it appropriate to remit the matter back to the file of ld. CIT(A) for deciding the same in accordance with the decision to be taken in AY 2002-03. 18. In the result, both the appeals of assessee are treated as allowed for statistical purposes. 19. To sum up, appeal of revenue in ITA No. 256/Hyd/06 is dismissed and the appeals of assessee in ITA Nos. 214 & 215/Hyd/10 as well as C.O. No. 32/Hyd/06 are allowed for statistical purposes.