Raeks Estates Developers Private Limited vs NFAC

PER S.RIFAUR RAHMAN,AM:

This appeal is filed by the assessee against the order passed by the ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC) dated 23.12.2025for the Assessment Year 2017-18.

Brief facts of the case are, the assessee is a company engaged in the business of real estate development and had acquired certain parcels of land in Gurgaon as its stock-in-trade. In accordance with the prevailing business model adopted by the DLF Group owing to restrictions under the land ceiling laws in Haryana, the assessee functioned as a land holding company and entered into a Development Agreement dated 04.09.2010 (as supplemented on 20.03.2012) with M/s DLF Utilities Ltd. ("DUL"), whereby exclusive development rights in the land were vested in DUL. During the relevant previous year, a portion of the land measuring 2.609 acres was compulsorily acquired by the Land Acquisition Collector, Gurgaon for compensation of Rs. 24,24,99,999/-alongwith interest of Rs.4,33,70,851/- which was received by the assessee. In terms of the Development Agreement, the assessee retained the cost of acquisition of land together with the interest component aggregating to Rs.14,14,81,614/-while the balance amount of Rs.14,43,89,236/- attributable to the development rights was transferred to DUL, which duly accounted for and offered the said amount to tax in its return of income. The Assessing Officer, however, disallowed the said payment and assessed the entire compensation in the hands of the assessee on the ground that the amount paid to DUL was not an allowable deduction.

Aggrieved against the above order, assessee is in appeal before the ld. CIT(A). After going through the submissions before him, ld. CIT(A) confirmed the order of the Assessing Officer. 4. Aggrieved with the above order, the assessee is in appeal before us raising following grounds of appeal :-

At the time of hearing, ld. AR for the assessee submitted that the authorities below have failed to appreciate the true nature of the business arrangement between the assessee and M/s DLF Utilities Ltd. ("DUL"). It was contended that the assessee was merely a land holding company and had acquired the land out of funds provided by DUL under a well-defined business model necessitated by the land ceiling restrictions prevailing in the State of Haryana. Referring to the Development Agreement, it was argued that the beneficial commercial interest and exclusive development rights in the land vested with DUL and, therefore, upon compulsory acquisition of the land, the amount attributable to such commercial interest was rightly transferred to DUL in accordance with the contractual obligations. It was further submitted that the amount so transferred has been duly accounted for and offered to tax by DUL and its assessment u/s 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) had been completed accepting the said income which is placed at PB Pgs 39 to 58. Consequently, the impugned addition in the hands of the assessee resulted in double taxation of the same income despite there being no loss to the Revenue. He placed reliance on the decision of the Coordinate Bench in Chrysilla Builders & Developers Pvt. Ltd. v. PCIT in ITA No.4139/Del/19 order dated 07.05.2025) and the judgment of the Hon'ble Supreme Court in CIT v. Excel Industries Ltd. 358 ITR 295(SC) to contend that a revenue-neutral transaction could not be subjected to taxation twice. It was also pointed out that under identical facts, assessments of other group land holding companies had been completed at the returned income, and therefore, on the principle of consistency also, the addition deserved to be deleted. The orders u/s 143(3) passed in the case of group concerns are placed at PB Pg 59 to 64. It was submitted that such agreement were executed between different entities of the group based on commercial and business expediency and same has neither resulted in tax benefit to the contractual company nor loss to the revenue.

On the other hand, ld. DR strongly supported the orders of the Assessing Officer and the ld. CIT(A). It was submitted that the compensation on compulsory acquisition was received by the assessee being the legal owner of the land and, therefore, the entire amount accrued to the assessee. According to the Revenue, the payment made to DUL was merely an application of income after its accrual and could not be allowed as a deduction in the absence of any statutory provision. It was further contended that DUL had neither acquired ownership of the land nor carried out any development activity on the acquired parcel prior to its acquisition by the Government and, therefore, the amount transferred to it did not represent any allowable business expenditure. The ld. DR placed reliance on the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC), CIT vs. Perlo Telecommunication and Electronic Components India (P.) Ltd. [2022] 141 taxmann.com 388 (SC) and Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC). The ld. DR accordingly submitted that the lower authorities had rightly assessed the entire compensation in the hands of the assessee and that the impugned order deserved to be sustained. However, the ld. DR has not disputed the fact that the payment so made by the assessee and which is subject matter of dispute was subjected to tax in the case of the M/s. DUL.

Considered the rival submissions and materiel placed on record. The solitary issue arising for our consideration is whether the Assessing Officer was justified in disallowing a sum of Rs.14,43,89,236/-representing the amount transferred by the assessee to M/s DLF Utilities Ltd. (DUL) towards development rights pursuant to the Development Agreement dated 04.09.2010 read with the Supplementary Agreement dated 20.03.2012, on the premise that the entire compensation received upon compulsory acquisition of land constituted income of the assessee alone. For sake of reference and for proper understanding of the right of the parties, it is appropriate to make reference to Article 4 and Article 10 of the Development agreement:

The facts giving rise to the controversy are largely undisputed. The assessee is a land holding company engaged in acquisition and holding of land as stock-in-trade. A parcel of land measuring 2.609 acres situated at Village Shikohpur, Gurgaon, which formed part of the assessee's inventory, came to be compulsorily acquired by the Land Acquisition Collector. The compensation received by the assessee was apportioned in terms of the Development Agreement whereby the assessee retained the cost of acquisition of land together with interest on compensation, whereas the balance amount representing the potential value attributable to development rights was transferred to DLF Utilities Ltd., the developer under the agreement. The controversy is confined to the taxability of such amount in the hands of the assessee despite the fact that the recipient DLF Utilities Ltd. has admittedly accounted for the same and discharged tax liability thereon.

At the outset, we find that it is pertinent to appreciate the peculiar business model adopted by the DLF Group and other real estate developers in the State of Haryana where land ceiling law prevails and imposes limitations in holding large contiguous parcels of land in a single entity. To overcome such law, acquisition of land by the developers was undertaken through various land holding companies, whereas development rights and commercial exploitation of such land vested with the principal developer under duly executed Development Agreements. It is noted that such business arrangement has not been shown by the Revenue to be either sham or colourable. In fact, the existence of such commercial structure is crucial to appreciate the surrounding circumstance while determining the real nature of the transaction.

In the above background, we find that the tax liability has to be determined having regard to the real substance of a commercial arrangement and not merely on the basis of legal title to land. Merely because legal ownership of land vested in the assessee company would not ipso facto lead to the conclusion that the entire economic benefit arising therefrom also belonged to the assessee, when the contractual arrangement clearly earmarked the commercial interest in favour of the developer.

We further find that as per Article 4 of the Development agreement, the funds acquisition of land were indeed provided by DLF Utilities Ltd. in the form of interest free security deposit and the assessee merely functioned as the land holding entity in accordance with the commercial understanding of the parties. The Article 10 of the Development Agreement specifically conferred exclusive development rights upon DLF Utilities Ltd. and simultaneously imposed corresponding obligations regarding development, approvals, licences, expenditure and commercial exploitation of the land. Thus, from the inception of the transaction, DLF Utilities Ltd. had substantial economic and commercial interest in the property whereas the assessee retained only such rights as were contractually specified in the Development Agreement and supplementary agreement.

In our considered opinion, once it is established that the consideration received upon compulsory acquisition was required to be apportioned in accordance with the pre-existing contractual obligations, the amount transferred to DLF Utilities Ltd. cannot be disallowed merely on the ground that no development activity under the agreement had taken place without considering the surrounding circumstances as already discussed above. Moreover, since the commercial interest in the land vested with DLF Utilities Ltd., it can safely be said that the amount was transferred under an overriding contractual obligation created between the parties.

We also find merit in the submission that the land constituted stock-in-trade of the assessee and not a capital asset and thus the same is subject to business arrangement. More importantly, as noted above, after execution of the Development Agreement, the beneficial commercial interest relating to development of the property vested with DLF Utilities Ltd as the said party assumed all commercial responsibilities, obligations and risks associated with obtaining approvals, licences, development and exploitation of the land. Consequently, the amount attributable to such development rights rightly belonged to the developer and was correctly transferred in accordance with the contractual arrangement. The authorities below have erroneously proceeded as though the legal ownership of land alone determines the incidence of taxation whole ignoring the settled principle that taxation must follow real income and real commercial rights flowing from binding contractual arrangements. The Development Agreement was never doubted, cancelled or declared non est by the parties to the contract and therefore, the consequences flowing therefrom cannot selectively be ignored by the Revenue.

Another important aspect which persuades us to accept the assessee's contention is that the transaction cannot be dissected only at the stage when profit has arisen owing to compulsory acquisition and the commercial arrangements have to be appreciated in their entirety. Had the acquisition of land resulted in loss, admittedly such commercial consequences would have been borne by DLF Utilities Ltd., being the entity possessing development rights and commercial interest therefore, the assessing officer cannot seek to ignore the arrangement only because, in the present year, the transaction has yielded profit. It is trite law that the commercial obligations cannot operate selectively depending upon whether the outcome is profit or loss and requires uniform interpretation.

Now coming to an equally significant aspect which is that the very same amount has been offered to tax by DLF Utilities Ltd. in its return of income and the same has been accepted by the Department in assessment completed u/s 143(3). Thus, once the Income tax department has already realised tax on the very receipt in the hands of the person who, under the commercial arrangement, was entitled to receive the same, it is not open to the assessing officer to make disallowance in the case of assessee which is inconsistent and self defeating.

The Coordinate Bench of this Tribunal in the case of Chrysilla Builders & Developers Pvt. Ltd. v. PCIT in ITA No.4139/Del/2019 order dated 07.05.2025arising from an identical business model of the same group, has categorically held that where the developer had offered the amount to tax and the Revenue had suffered no prejudice, the arrangement could not be disregarded and the exercise sought to be undertaken by the Department was wholly revenue neutral. The Tribunal further relied upon the judgment of the Hon'ble Supreme Court in CIT v. Excel Industries Ltd. for holding that no useful purpose would be served by taxing the same receipt twice in different hands and revenue must not engaged in fruitless litigation.

The facts before us are materially identical as the recipient company i.e. M/s. DUL has offered the impugned receipt to tax and the Department has accepted such assessment. Therefore, sustaining the addition in the hands of the present assessee would inevitably result in double taxation of the same income, a consequence which is impermissible in law unless specifically authorised by statute.

The assessee has also placed on record assessment orders passed u/s 143(3) in the cases of other land holding companies of the same group, namely Naja Estates Developers Pvt. Ltd., Milda Buildwell Pvt. Ltd. and Cadence Builders & Constructions Pvt. Ltd., wherein under identical Development Agreements and identical business model, no such addition has been made and the returned income has been accepted. The Revenue has not pointed out any distinguishing feature warranting a different view in the present case. We are conscious of the fact that the principle of res judicata may not strictly apply to income-tax proceedings, however, consistency in approach is an equally important facet of tax administration and in absence of any distinguishing facts, a contrary treatment in the case of one group concern alone cannot be sustained.

With regard to judgments cited by Ld. CIT DR namely Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172) (SC), CIT v. Perlo Telecommunication and Electronic Components India (P.) Ltd. (141 taxmann.com 388) (SC) and Lachminarayan Madan Lal v. CIT (86 ITR 439) (SC), are clearly distinguishable on facts as well as in law and do not advance the case of the Revenue.

The reliance placed on the aforesaid decision is wholly misplaced. In the said case, the Hon'ble Supreme Court was concerned with the taxability of interest earned on surplus funds temporarily invested in bank deposits prior to commencement of business. The Court held that interest income, having independently accrued to the assessee, was chargeable to tax under the head "Income from Other Sources" and could not be adjusted against pre-operative expenditure.

The controversy in the present case is entirely different. There is no dispute regarding the taxability of any independent receipt in the hands of the assessee. The issue is whether the amount of Rs.14,43,89,236/- ever accrued as income to the assessee when, under a pre-existing and binding Development Agreement, the beneficial commercial interest in the land and the corresponding right to receive compensation attributable to development rights vested in DLF Utilities Ltd. The assessee merely discharged an overriding contractual obligation by transferring the amount to DUL. Thus, this is not a case of application of income after accrual, but a case where the income itself accrued directly to another person by virtue of an overriding title. The principle laid down in Tuticorin Alkali Chemicals dealing with taxation of independent income has, therefore, no application.

At the outset, we find that the citation quoted by the ld. DR only pertains to notice issued by the Hon’ble Apex Court and the same does not contain any judgment or finding and it appears that the matter is still sub-judice. In any case, the dispute before the Hon’ble Supreme Court arising from the under lying order of Hon’ble Madras High Court is regarding allowability of an expenditure based on revised computation of income filed before AO and not by way of revised ITR. The said decision has no application to the facts of the present case.

Similarly, the reliance upon Lachminarayan Madan Lal is misconceived. In that case, the Hon'ble Supreme Court upheld disallowance of commission paid to related concerns after finding that there was no evidence of actual services rendered and the payments were not incurred wholly and exclusively for the purposes of business. The Court emphasised that mere existence of an agreement does not automatically entitle an assessee to deduction if the agreement is found to be colourable or unsupported by commercial necessity.

The facts before us stand on an entirely different footing. The genuineness of the Development Agreement has never been doubted by the Revenue. The purpose and intention behind the agreement is also not in dispute. Further, the agreement governed the commercial relationship between the parties and was acted upon consistently by both parties. DLF Utilities Ltd. not only financed acquisition of the land but also acquired exclusive development rights and duly offered the impugned receipt to tax in its own assessment, which has been accepted by the Department. There is thus neither any allegation of sham arrangement nor any dispute regarding the genuineness of the contractual obligations. The ratio of Lachminarayan Madan Lal, which dealt with colourable commission payments lacking commercial substance, is therefore wholly inapplicable.

Thus, in the light of aforesaid discussion and keeping in view the commercial substance, surrounding circumstances and lack of loss to the revenue, we find no justification in the action of the AO and CIT(A) in making disallowance of Rs.14,43,89,236/- representing the amount transferred by the assessee to M/s DLF Utilities Ltd. (DUL) and hence the impugned addition is accordingly deleted and the grounds raised by the assessee are allowed.

In the result, the appeal filed by the assessee is allowed.