Income Tax Appellate Tribunal - Mumbai
Vijay Construction Co. vs Dy. Cit, Range 12(3) on 31 May, 2005
Equivalent citations: [2005]3SOT840(MUM)
JUDGMENT
S.R. Chauhan, (JM) ITA Nos. 5687/Mum/2001 and 03/Mum/2002 are cross appeals by assessee and revenue respectively for assessment year 1998-99 and are directed against the order of CIT(A), Mumbai dated 31-10-2001.
2. We have heard the arguments of both the sides and have also perused the records.
3. The relevant facts, in short, as ascertainable from the orders of authorities below and other records are that the assessee is a partnership firm, which came into existence on 3-8-1981, the partnership deed having been executed on 29-12-1981. The object of assessee-firm was to carry on business of construction of buildings, sale/purchase and development of land, effecting repairs and renewal to buildings and render allied service, etc., and such other business as may be mutually agreed upon by partners in terms of agreement dated 12-11-1981. The assessee-firm agreed to purchase a piece of land together with structures standing thereon admeasuring 15,000 sq. mts. lying and situated at Andheri Kurla Road, Mumbai, from the owner Miss G.D. Coomana for an aggregate consideration of Rs. 11 lakhs. The original owner executed the Deed of Confirmation on 28-6-1982 confirming the agreement for sale and it was registered with the Sub-Registrar of Assurances. The said property was reserved initially for recreation garden and a portion of the said property was encroached upon authorisedly. The property was also affected by the provisions of Urban Land (Ceiling and Regulation) Act, 1976. The physical possession of the said property since the date of its acquisition was with one M/s. Krishnakumar & Co.
3.1 The assessee-firm underwent various changes in its constitution from time to time. New partners were admitted, profit-sharing ratios were revised and some of the old partners retired. However, the terms and conditions of the partnership, as evidenced in subsequent deed dated 1-4-1993 and 30-12-1993, continued to be more or less similar to those contained in the original deed of partnership dated 29-12-1981. On 24-3-1994, another deed of partnership was executed clarifying that the activity of assessee-firm was only with respect to letting out of property.
3.2 The assessee took steps to obtain physical possession and paid Rs. 5 crores to M/s. Krishnakumar & Co. On receipt of the said amount, the deed of release was executed on 28-3-1994 whereby the said M/s. Krishnakumar & Co. relinquished all their right, title, interest and claim in the said property in favour of the appellant. One, Mr. Bashir Ahmed was also claiming ownership of the said property through adverse possession and this was also settled in terms Consent Terms dated 14-7-1997 filed in Suit No. 1250 of 1997 on payment of compensation of Rs. 1.08 crores. Payment of compensation of Rs. 90 lakhs to M/s. Lotus Trading Co. and M/s. G.K. Enterprises was also claimed to have been made to obtain the surrender of their tenancy rights.
3.3 The property in question was claimed as held and shown in the books of account as investment; and in Balance Sheet it was shown as an asset from the very beginning. In the revenue records, the said property was shown as held for agriculture use and absolutely no attempt was made by the appellant, after acquisition, to convert the same to a non-agriculture use. Subsequently, after quite sometime the appellant made efforts to clear all legal hurdles, perfect the title and sell the property in question. During the previous year relevant to assessment year 1988-99, the appellant agreed to sell the said property to M/s. Hotel Leela Venture Ltd. for an aggregate consideration of Rs. 56.20 crores by executing a memorandum of understanding dated 27-6-1997. The conveyance deed was executed on 19-1-1998 after obtaining clearances from the appellate authority.
3.4 The assessee filed the return of income for assessment year 1998-99, the year under appeal, declaring the transfer of the said property as its long-term capital asset, resulting in capital gains and returning taxable long-term capital gain of Rs. 25.93 crores after claiming various expenses, the indexed cost of acquisition and cost of improvement thereof. Order under section 143(3) was passed on 30-3-2000 determining the total income at Rs. 40.55 crores treating the transactions of purchase of land by the appellant on 12-11-1981 and its subsequent sale on 27-6-1997 as an adventure in the nature of trade and charging the gains arising therefrom under the head profits and gains of business or profession'. The assessing officer also disallowed the claim of compensation payments of Rs. 50 lakhs to M/s. Lotus Trading Co. and payment of Rs. 40 lakhs to M/s. G.K. Enterprises. In his assessment order the assessing officer placed reliance on original partnership deed dated 29-12-1981 as also on various deeds of reconstitution of partnership dated 1-4-1993 and 13-12-1993. Supplementary Partnership Deed dated 23-3-1994, purchase deed of Property dated 12-11-1981 and Release Deed dated 28-3-1994.
3.5 Aggrieved by assessing officer's assessment order, the assessee preferred appeal before CIT(A), who granted partial relief to the assessee by holding that the assessee acquired the land in question as an asset in the year 1981 constituting investment of the partnership firm and it was only in March, 1996, when the appellant made an application for commencement certificate and development permission, that the asset in question got converted into stock-in-trade. Therefore, the year ending 31-3-1996 is to be taken as the year in which the conversion of the asset into stock-in-trade took place. Under these circumstances, the assessing officer will have to compute the capital gain by working out the fair market value as on 31-3-1996. The difference between the sale consideration realized on 19-1-1998, amounting to Rs. 56.2 crores and the fair market value on 31-3-1996 as reduced by the admissible expenses (as already considered in assessment order) would constitute the Business Income. The learned CIT(A) also directed the assessing officer that for arriving at the FMV the assessing officer will take the inflation index of 281 as on 31-3-1996, with reference to the inflation index of 331 on sale price of Rs. 56.2 crores in assessment year 1998-99; and that the cost of acquisition and cost of improvement will have to be indexed for computing the capital gain in the year of conversion, i.e., assessment year 1996-97, which will suffer tax in the current year in view of the provisions of section 45(2) of the Income Tax Act, 1961. The learned CIT(A), thus, treated the land as investment till 25-3-1996 (the date on which application was made by assessee to BMC for IOD), conversion thereof into stock-in-trade on the said date. Hence, aggrieved by the impugned appellate order of learned CIT(A), both the assessee as well as revenue are in appeal before the Tribunal.
4. In IT Appeal No. 5687/Mum/2001, the assessee has raised the following grounds of appeal before the Tribunal :
1. On the facts and circumstances of the case and in law, learned CIT(A) erred in holding that it was a case of conversion of investment into stock-in-trade on 25-3-1996 and erred in not appreciating that the transaction was purely a case of transfer of capital asset,
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the expenses incurred on development during the assessment years 1983-84 to 1993-94 amounting to Rs. 3,90,931 duly accounted for and reflected in the Balance Sheets on the respective dates.
3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the payments made to two tenants, viz., Lotus Trading Co. and G.K. Enterprises amounting to Rs. 50 lakhs and Rs. 40 lakhs respectively, towards compensation charges. The CIT(A) erred in not appreciating that it was a necessary cost to be incurred in order to hand over vacant possession of the property to the buyer.
4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in charging interest under sections 234A and 234B.
5. The appellant craves leave to add, amend and/or alter any of the grounds of appeal if need be.
6. The appellant prays that on the grounds stated above, they may be granted relief by allowing the claim of capital gains made by the appellants after allowing the deductions for development expenses amounting to Rs. 3,90,931 incurred during assessment years 1983-84 to 1993-94 and the compensation payments amounting to Rs. 90 lakhs."
5. In IT Appeal No. 03/Mum/2002, the revenue has raised the following grounds of appeal before the Tribunal :
"1 (i) On the facts and circumstances of the case and in law, the learned CIT(A) erred in directing to treat the plot of land situated at Andheri Kurla Road, Mumbai, as investment up to 25-3-1996, the date on which the assessee-firm made an application to the Municipal Corporation of Greater Bombay for development, permission and grant of commencement certificate and, therefore, part of sale consideration was capital gain and part of the same as trading receipt.
(ii) While doing so, the learned CIT(A) completely failed to appreciate that the plot in question was central to the partnership deed and business of the said partnership was a singly venture partnership limited to the development of the above-referred property.
(iii) The learned CIT(A) failed to appreciate that the totality of facts, i.e., the purpose enumerated in the purchase agreement dated 12-11-1981, the terms and conditions of partnership deed and subsequent act of the assessee-firm in getting the plot cleared from all encumbrances and development thereof, proves beyond doubt that the plot in question was business asset right from the inception of the firm.
(iv) The learned CIT(A) also failed to appreciate that the plot was always intended to be used and was always used also as a business asset notwithstanding the fact that the assessee-firm had shown as investment in capital asset in its books of account.
(v) While deciding the issue, the learned CIT(A) has completely ignored the terms of purchase agreement of the plot, objects of the partnership deed and activities carried out in the plot of land by the assessee firm.
2(i) On the facts and circumstances of the case and in law, the learned CIT(A) erred in directing to adopt reverse route of indexation for arriving at FMV as on 31-3-1996.
(ii) While doing so the learned CIT(A) completely failed to appreciate that reverse route of indexation cannot be adopted for arriving the FMV as after 25-3-1996 the asset had become business asset (as per his own finding) and the sale price of Rs. 56.20 crores was arrived at after considering the development of plot like approval from BMC approval for NA and exemption under Urban Land Ceiling Act.
(iii) The learned CIT(A) failed to appreciate the simplistic formula of reverse indexation route for arriving at FMV of the flort as on 31-3-1996 cannot be adopted on the facts and circumstances of this case.
(iv) The learned CIT(A) also failed to appreciate that by way of adopting reverse route of indexation the value of capital gain was unrealistically inflated.
(v) On the facts and circumstances of the case and in law, the learned CIT(A) ought to have directed the assessing officer to refer the matter to Valuation Officer under section 55A of Income Tax Act once he gave the finding that the plot in question was investment up to 25-3-1996."
6. First we take up ground No. 1 of assessee along with ground No. 1 of revenue as both these grounds are interconnected. The issue involved therein is as to whether gain on sale of land is assessable as capital gains or as business income? The assessing officer treated the solitary transaction of purchase and sale of land as adventure in the nature of trade; the assessing officer, therefore, treated the gain on sale of land by assessee to be taxable as business income and assessed the same accordingly. The learned CIT(A) held that the land was investment up to 25-3-1996 and on that date it was converted into stock-in-trade of business carried on by assessee and he, therefore, directed the assessing officer to compute/tax capital gains up to the aforesaid date and thereafter up to the date of sale as business income.
7. The learned AR of assessee has contended that letting out of the property is the main activity/object of assessee, though selling and letting out both are mentioned in various partnership deeds. In this regard, he has referred to paras 4 and 5 of partnership deed dated 29-12-1981 (page 310 PB), para 3 of partnership deed dated 1-4-1993 (page 296 PB), para 3 of partnership deed dated 30-12-1993 (page 274 PB), para 1 of supplementary partnership deed dated 24-3-1994 (page 268 PB) and para 3 of partnership deed dated 28-1-1998 (page 249 PB) contending that the letting out of the property has been specifically provided therein. He has contended that the assessee's contentions have been mentioned on pages 14 and 15 of assessing officer's assessment order and on pages 5, 7 and 10 to 12 of learned CIT(A)'s appellate order. He has specifically drawn our attention to the discussions made by learned CIT(A) in para 5.2 of his appellate order. He has contended that this was the solitary transaction of the purchase of land by assessee and that till the date of sale on 27-6-1997, for as long as gap of 16 years. The assessee made no development activity. He has contended that simply because of assessee's name containing, within itself, the word 'construction', the assessee's business activity should not be taken as that of development during the said period. He has contended that simply because of getting permission (IOD) from BMC, the property/ land does not become assessee's stock-in-trade of business and that even after getting the said permission, this land/property still remains assessee's investment, capital asset.
8. Referring to section 45 the learned AR of assessee has contended that the same provides that any profit or gain arising from the transfer of a capital asset shall be chargeable to income-tax under the head 'Capital gain'. He has contended that section 2(14) defines Capital Asset as 'capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession...." Thus as evident from above, even a business asset can be a capital asset if it is not stock-in-trade of the business and income from sale of the said business asset can be assessed as capital gains. He has contended that the objection of assessing officer that the assessee was carrying on business activity and, therefore, gain on transfer of land is business income is not relevant. He has also contended that in order to determine whether the transaction of sale of land has resulted in capital gain or business income, the issue which needs to be decided is whether the land constituted stock-in-trade (as alleged by the assessing officer) or whether the land was an investment (as contended by the assessee and as reflected in the books of account of the assessee) and not whether assessee carried on business activity or not.
9. He has contended that the aforesaid land was shown as investment in the books of assessee since past 16 years, and no construction/ development activity was carried out on the aforesaid land. He has contended that the aforesaid land was sold after a period of 16 years and the assessee has not indulged in any other activity of purchase/sale of land, i.e., the aforesaid transaction is a solitary transaction. He has contended that the assessee had purchased the land for the purpose of construction of building and letting out the same as mentioned in various partnership deeds; and the partnership deed dated 24-3-1994 clarifies that the activity of the appellant-firm was only with respect to letting out of property. He has contended that the partners are even otherwise having rental income; that the aforesaid land cannot be treated as stock-in-trade and in turn, the gain on sale of land to be business income merely because the assessee is a builder or is engaged in the business of properties or because its object, as specified in the memorandum of association or partnership deed, is to deal in land and properties.
10. The learned AR of assessee has placed reliance on the following decisions :
1. CIT v. Rajasthan Mines Ltd. (1970) 78 ITR 45 (SC)
2. CIT v. Nathuram Ramnarayan (P) Ltd (1985) 151 ITR 767 (Bom)
3. Fort Properties (P) Ltd. v. CIT (1994) 208 ITR 232 (Bom)
4. CIT v. National Properties Ltd. (1978) 113 ITR 793 (Cal)
5. CIT v. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad)
6. P.K.N. Co. Ltd v. CIT (1963) 47 ITR 195 (Mad) (affirmed in CIT v. P.KN. Co. Ltd. (1966) 60 ITR 65 (SC))
7. D.L.F. Housing & Construction (P) Ltd. v. CIT (1983) 141 ITR 806 (Del)
8. D.L.F. United Ltd. v. CIT (1986) 158 ITR 342 (Del)
9. Madanmohan Mangaldas v. ITO (1980) 35 TTJ (Ahd) 134
10. M. Raman Pillai v. CIT (1964) 51 ITR 829 (Ker)
11. P.J. Udani v. CIT (1967) 63 ITR 766 (AP)
12. Roshanlal Agarwal v. Asstt. Commissioner (2002) 123 Taxman 47 (Mum) (Mag)
13. Heritage Estates (P) Ltd. v. ITO (1985) 11 ITD 519 (Bom)
14. CIT v. S.S. Thiagarajan (1981) 129 ITR 115 (Mad)
15. CIT v. Premji Gopalbhai (1978) 113 ITR 785 (Guj).
11. The learned AR of assessee has drawn our specific attention to the decision of Fort Properties (P) Ltd. v. CIT (1994) 208 ITR 232 (Bom), CIT v. National Properties Ltd. (1978) 113 ITR 793 (Cal), CIT v. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad), D.L.P Housing & Construction (P) Ltd v. CIT (1983) 141 ITR 806 (Del) contending that therein though the business of the assessee was to deal in properties as a result of which the property was reflected in the books of account as stock-in-trade yet it was held that the property constituted capital asset resulting in capital gains and not business income taking into consideration that the sale was an isolated transaction and that the land was held for a long duration (10 years). He has also drawn our specific attention to the cases of M. Raman Pillai v. CIT (1964) 51 ITR 829 (Ker), P.J. Udani v. CIT (1967) 63 ITR 766 (AP) and Roshanlal Agarwal v. Asstt. Commissioner (2002) 123 Taxman 47 (Mum) (Mag) contending that therein though the assessees were builders/ contractors, it was held that transaction of sale of land being a solitary transaction resulted in capital gains and not business income. It is, therefore, submitted that as the transaction of land, in the case of the present assessee, was a solitary transaction and as the land was held for a period of 16 years and as the said land was reflected as investment in the balance sheet, the said land constituted a capital asset, the sale of which resulted in capital gains and not business income.
12. The learned AR of assessee has contended that as the assessee wanted to construct building on land for the purpose of letting it out, the land would definitely be only a capital asset and not stock-in-trade. He has, however, also contended that even if the intention of the assessee was to construct and sell building, yet in view of the above-mentioned submissions it cannot be held that the land was stock-in-trade. Referring to the assessing officer's finding on page 28 of his order that "Had the partners or the assessee-firm itself been engaged in an activity /business different from the sale/purchase of land(s), then the said activities of the assessee-firm might have been termed as a capital investment", he has contended that the partners of the assessee-firm are having rental income also which fact is undisputed as evident from page 14 of the assessment order. He has contended that it may also be noted that as in the case of the assessee, even in the case of Fort Properties (P) Ltd. v. CIT (1994) 208 ITR 232 (Bom) the object clause in the memorandum of association specified selling as well as letting of land and buildings. He has contended in the above-mentioned case, despite the aforesaid object and despite the fact that the land was shown as stock-in-trade in the books of account, the jurisdictional High Court held that it was a capital asset and not a stock-in-trade by taking into account the fact that the purchase and sale of land was a solitary transaction as is also in the case of the present assessee. He has accordingly contended that the objection of the assessing officer is not only legally unsustainable, but also factually incorrect.
13. He has contended that the learned CIT(A) has held that on 25-3-1996 when the assessee made application for IOD, the capital asset was converted into stock-in-trade by virtue of the provisions of section 45(2). Referring to the case of Ramesh Chandra Kanhaiyalal v. ITO (2002) 122 Taxman 36 (Indore) (Mag), he has contended that the Tribunal has held therein that conversion under section 45(2) took place when the assessee obtained the licence of a coloniser. He has, accordingly, contended that in view of the above, the departmental appeal is liable to be dismissed, i.e., the whole gain on transfer of land cannot be treated as business income.
14. He has contended that as regards the issue that the assessee has spent Rs. 11.54 crores on development, it may be clarified that out of the aforesaid amount, Rs. 7.63 crores have been paid as tenant compensation, Rs. 1.43 crores have been incurred on interest expenditure, Rs. 56 lakhs have been incurred on brokerage, Rs. 4,95,500 on Stamping & Registration charges, Rs. 15 lakhs on service charges, Rs. 12,77,286 on Legal & Professional fees and Rs. 46,52,800 on Earth & Debris Filling charges. In this regard, he has referred to pages 153 & 193 of paper book being MOU and the Deed of Conveyance which clearly show that the land was sold without being developed.
15. The learned AR of assessee has contended that unlike as in the case of the assessee, wherein the sale of land is a solitary transaction, in the case before the Indore Bench 13) plots of land were sold; and in the case before Indore Bench, the assessee had incurred cost of improvement for construction of road, garden, drainage, etc., whereas, in the case of the present assessee, no construction/development has been done. He has accordingly contended that instead of following the Indore Bench decision for applying section 45(2) and for holding that land was converted to stock-in-trade on date of application for IOD, the judgment of the jurisdictional High Court in the case of Fort Properties (P) Ltd. v. CIT (1994) 208 ITR 232 (Bom) should be followed wherein though the land was reflected as stock-in-trade, it was held to be a capital asset resulting in capital gains as it was a solitary transaction. He has contended that similar view has been taken in D.L.F. Housing & Construction (P) Ltd. v. CIT (1983) 141 ITR 806 (Del) wherein though the land was shown as stock-in-trade, it was held to be capital asset resulting in capital gains as it was a solitary transaction. He has also relied on D.L.E Housing & Construction (P) Ltd. v. CIT (1983) 141 ITR 806 (Del) and D.L.F. United Ltd. v. CIT (1986) 158 ITR 342 (Del) wherein though the land was purchased for the purpose of development, it was held to be a capital asset as no development had taken place. He has also contended that the land, which is a capital asset, does not become stock-in-trade merely because the assessee applies for IOD or gets N.A. permission or gets plans approved, or builds a compound wall around the land or improves the land by removal of debris. He has also cited the following decisions in his support:
1. Deep Chandra & Co. v. CIT (1977) 107 ITR 716 (All)
2. Shyamala Pictures (P) Ltd. v. CIT (1983) 142 ITR 115 (Mad)
3. CIT v. V.A. Trivedi (1988) 172 ITR 95 (Bom)
4. ITO v. Remy Perfumes (P) Ltd (1990) 32 ITD 398 (Mad),
5. ITO v. N.R.P. Ltd (1982) 1 ITD 64 (Bom),
6. Mrs. Gayatri Khanna v. Dy. CIT (2002) 124 Taxman 72 (Del) (Mag),
7. Sri Gajalakshmi Ginning Factory Ltd. v. CIT (1952) 22 ITR 502 (Mad).
16. He has contended that if the intention of an assessee is to construct building on land for the purpose of selling it, the land does not constitute stock-in-trade till the building is constructed. In support of the above, he has placed reliance on the decision of the Pune Bench of the ITAT in the case of Shanti Builders v. Joint CIT (2002) 74 TTJ (Pune) 578 assessment year 1997-98, copy of which has been filed on record, and has specifically referred to pages 31, 47, 48 and 49 of the said decision.
17. He has, accordingly, contended that the entire gain on transfer of land should be assessed as capital gains.
18. As against the above, the learned Departmental Representative has referred to page 2 of assessment order contending that the assessee has been incurring various expenses on this property from 1992-93 to 1998-99. He has taken us through various pages of assessment order and in particular pages 5 to 9 thereof and contended that the assessee had purchased this land to construct building and then to let it out and that the intention of the assessee was not to invest in a capital asset but was rather to do something like an adventure in the nature of trade or business and thus to earn profits. He has contended that the assessing officer has elaborately dealt with the matter and has discussed the relevant facts including the various clauses in various partnership deeds mentioning the business of assessee-firm as buying/ selling/developing/letting out immovable properties and also single venture business. Referring to page 9 of assessment order, he has contended that the assessing officer has given finding that there was a regular scheme on the part of assessee to earn profits. Referring to pages 19 and 20 of assessment order he has contended that the assessing officer has duly discussed the decisions cited by learned AR of assessee before the assessing officer and has drawn his finding that despite various changes in the constitution of partnerships, the different partners still are those persons who have been engaged in the business of real estate and that various partnership deeds indicate that the business of assessee-firm has been the purchase /sale/development, etc., of land/immovable property.
19. Referring to page 21 of assessment order, the learned Departmental Representative has drawn our attention to the following para contained in the assessment order :
"When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit and the activity can only be described as a business venture."
He has referred to page 23 of assessment order and contending that the assessing officer has relied on P.M. Mohammad Mira Khan v. CIT (1969) 73 ITR 735 (SC) and Khan Bahadur Ahmed Alauddin & Sons v. CIT (1968) 68 ITR 573 (SC) and has given his comments in respect of the fact-situation of the case in hand in the light of the legal principles laid down in the said two decisions. He has contended that the assessing officer has noted that the present assessee has, after purchasing the land, further improved the same by purchasing occupancy rights from M/s. Krishan Kumar & Co. for a consideration of Rs. 5 crores and by incurring huge expenses on negotiations with tenants for their eviction, earth levelling and removable of debris. He has also specifically referred to the findings/ observations of assessing officer on pages 26, 27, 28 & 29 of assessment order. He has drawn our specific attention to page 29 of assessment order wherein the assessing officer has mentioned as under:
"The assessee had undertaken the following activities on the said plot of land from the date of purchase in the year 1981 to the year of sale in 1998:
(i) The occupancy rights over the land were purchased for Rs. 5 crores in the year 1994.
(ii) The land was got converted into non-agricultural land, in the year 1996, as nearly 60% of the land purchased was originally agricultural land.
(iii) Permission was obtained from the Urban Land Ceiling Authorities.
(iv) Plans for the development of the plot were got approved from the BMC.
(v) The land was got levelled and debris was got removed.
(vi) Tenants were got removed.
(vii) Compound wall was erected.
The above activities of the assessee-firm constitute development of the said plot. Therefore, the said activities of the assessee-firm fall within an adventure in the nature of trade or business, in view of the judgment in the case of Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC), cited earlier.
Further, it has also been held that even a solitary transaction can constitute an adventure in the nature of trade or business."
20. Referring to page 30 of assessing officer, the learned Departmental Representative has contended that the assessee has spent a sum of Rs. 11.50 crores in various financial years from 1993-94 to 1997-98 on this property and has drawn our attention to the assessing officer's conclusion to the following effect :
"It is quite clear that the activity of the purchase, development and sale of the land by the assessee falls within an adventure in the nature of trade or business. Therefore, the surplus arising from the same is hereby being taxed under the head 'Profits and gains of business or profession'.'
21. The learned Departmental Representative has contended that the learned CIT(A) has come to the middle path in his conclusion as he has drawn in para 6.3 on page 12 of his impugned order but the learned CIT(A)'s reasoning does not bear with facts. He has contended that the assessee's intention had all along been to develop, construct and sell the property since very beginning and it is not that it is only on obtaining of IOD that the assessee changed/formed its intention to develop the property. He has contended that merely obtaining of IOD does not show the change of intention on that day and that prior thereto purchase of land by assessee does not become investment in capital asset. He has contended that the assessing officer has considered the various partnership deeds and has come to the finding that the assessee's intention was always of doing the business of buying and selling real estate. He has contended that the mere fact of there being this solitary transaction does not make it investment. He has contended that it has been an organised and systematic activity of assessee to purchase this land, develop it and then to sell it.
22. The learned Departmental Representative has contended that the various decisions cited by the learned AR of assessee are distinguishable on facts. He has elaborated the facts of the abovementioned decision of ITAT, Pune in the case of Shanti Builders (supra) and has tried (sic) to show that the same is quite distinguishable from the instant case on facts.
23. The learned Departmental Representative has emphatically placed reliance on Vitta Kristappa v. ITO (2005) 92 ITD I (Hyd) (TM) and contended that the Tribunal has also considered Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386 (Bom) at para 12 of its order; and he has specifically drawn our attention to last portion of para 11 on page 23 of the order. He has supported the order of assessing officer.
24. In rejoinder, the learned AR of assessee has contended that the expenses incurred by assessee for getting the land vacated by occupants and on removal of debris and levelling of earth cannot be treated as development. Regarding the learned CIT(A)'s basis for taking the date of 25-3-1996(para5.1), he has contended that during that year the, assessee got a part of the land converted from agricultural to non-agricultural but the assessee's purpose in that regard was to raise construction thereon for letting out and not for sale; and all this makes only assessee's investment in asset and not stock-in-trade. He has contended that the various activities referred to have taken place after March, 1996.
25. We have considered the rival contentions, relevant material on record as also the cited decisions.
26. From the perusal of record we find that the assessing officer treated the land as stock-in-trade because the partnership deed states that the business of the assessee-firm is construction of buildings, purchase and development of land; the purchase deed also states that the assessee-firm shall be entitled to develop the said property and construct and complete building thereon, the partners of the appellant-firm are engaged in the business of real estate, development and construction. In the opinion of assessing officer had the partners of the appellant-firm been engaged in an activity/business different from sale/purchase of lands, then the said activities of the assessee-firm might have been termed as capital investment.
27. As per assessing officer the assessee has undertaken various activities enumerated on page 29 of assessment order, which constitute development. Assessing officer has relied on Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC). Also the appellant has incurred various expenses such as salary expenses, interest expenses, bonus expenses, etc. The assessee has claimed expenditure of Rs. 11.54 crores for development during financial years 1993-94,1995-96,1996-97 and 1997-98. The aforesaid activities show that the assessee was carrying on business.
28. We find from the perusal of record that for drawing his conclusion that gain on sale of land is allowable partly as capital gains and partly as business income, the learned CIT(A) rendered his discussion/ finding in paras 5.1 and 5.2 of his order, in short, are as under:
"Insofar as the object clause of the partnership deed is concerned, no conclusion can properly be based solely on the objects or powers mentioned therein. They are relevant matters, which should be taken into account and kept in view in determining the character of the transaction carried on. The objects and powers are there to carry on a trade or business but their existence does not ipso facto mean that they have been used. What is necessary is to examine the intrinsic nature and character of the transaction itself in the light, of course, of the objects and powers of the company and the surrounding circumstances and facts. In the case of Deepchandra & Co. v. CIT (Kanpur) 107 ITR 716, it was held that the mere fact that a person invested money for the purpose of reselling whenever a suitable opportunity arises does not give a sufficient ground to hold that the transaction is in the nature of trade. The court further observed that if the partnership was really constituted for trading, one would have expected some other or similar purchases of land by the firm for the purpose of selling them at a higher price after development. Similarly, in the case of Janaki Ram Bahadur v. CIT (Cal) 57 ITR 21, it was observed that the appellant made a profitable bargain when he purchased the property and granting further that the appellant had when he purchased it had a desire to sell the property, if a favourable offer as forthcoming, these could not without other circumstances justify an inference that the appellant intended by purchasing the property to start a venture in the nature of trade. Absence of advertisement inviting offers for purchasing the property, and absence of brokers in the negotiations for sale are circumstances, which lead to no positive inference.' Till financial year 1996-97 no development was carried out. Most of the activity during this period related to keeping and securing better title to the property, fencing of the property including incurring of expenses on security, etc. The property was shown as an asset, i.e., as an investment in the Balance Sheet ever since the date of purchase. The plans for the building were got passed during the financial year 1996-97 when large part of the property which was, agricultural was got converted to non-agricultural land. Getting the property cleared from all encumbrances does not necessarily lead to the conclusion that it was a Business Asset. Getting a better title, strengthening the title and preserving the title are activities that any reasonable person will do to safeguard his investment."
29. The learned CIT(A)'s further discussion/finding in paras 6 to 6.3 of his impugned appellate order, in short, is as under :
"The occupancy right over the land was purchased for Rs. 5 crores in the year 1994 and subsequently a part of the land which was originally agricultural was converted into non-agricultural land. These facts have not been disputed by the assessing officer. The appellant obtained permission from the ULC authorities, got the plan for development of plot, approved from BMC, levelled the land, did removal of debris, removal of tenants and got the compound wall erected. The payment for purchase of occupancy right is attributed only for obtaining better title and cannot be said to be an activity for development. The conversion of the land to non-agricultural was made in July 1997 as is evident from the letter issued to the appellant from the office of the Collector, Mumbai Suburban Dist. on 15-7-1997. Application under ULC are required to be made irrespective of whether one would like to develop the land or sell the land as an investment. The appellant was required to furnish the copy of the application so made, furnish copy of commencement certificate, etc., and it is noticed that the plans were approved by Greater Bombay Municipal Corporation vide their letter CE/6080/WS/AK dated 2-11-1996. It is further noticed that the appellant had made application as early as on 25-3-1996 for development permission and grant of commencement certificate to carry out development and building permission to erect building. The BMC of Greater Bombay issued a Commencement Certificate /Building permit vide letter dated 5-8-1997 in respect of land in favour of the assessee. The levelling work was done only during the financial year 1997-98 and that was the point of time when the tenants were also removed.
Thus, it is clear that by making the application to the Municipal Corporation of Greater Bombay on 25-3-1996 for development permission and grant of commencement certificate, the appellant took a decision to go ahead and start working on the plot of land which was till that time held by them as an investment. Under these circumstances, it is clear that, it was only around 25-3-1996 that the appellant in fact converted the long-term asset into his stock-in-trade. The bulk of the expenses incurred thereafter clearly confirm, that after 25-3-1996, the appellant was holding on to the land in question, only as his stock-in-trade and not as capital asset. To my mind, it is a case covered by provisions of section 45(2).
Thus, looking into the totality of the circumstances, I am of the view that the land in question acquired as an asset in the year 1981 constituted investment of the partnership firm and it was only in March 1996, when the appellant made an application for commencement certificate and development permission, that the asset in question got converted into stock-in-trade. Therefore, the year ending 31-3-1996 is to be taken as the year in which the conversion of the asset into stock-in-trade took place.
Under these circumstances, the assessing officer will have to compute the capital gain by working out the Fair Market Value as on 31-3-1996. The difference between the sale consideration realisetion 19-1-1998, amounting to Rs. 56.2 crores and the Fair Market Value on 31-3-1996 as reduced by the admissible expenses (as already considered in assessment order) would constitute the business income. The capital gain computed as on 31-3-1996 and the busniess income computed as mentioned, would together form part of taxable income of the assessee."
30. In P.M. Mohammad Mira Khan v. CIT (1969) 73 ITR 735 (SC), the assessee had entered into an agreement with one AVG for purchase of vast areas of land forming part of an estate for Rs. 6 lakhs, paid Rs. 11,000 and the balance of Rs. 5.89 lakhs was to be paid before 25-9-1955. One of the terms of agreement was that the sale deed was to be executed in favour of either the appellant or his nominees. It was found that the appellant did not have the resources either to buy or to cultivate the estate himself. The assessee divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers for a sum of Rs. 5,18,500 and the 23rd plot was retained by the appellant himself. In the circumstances, it was held that the transactions of appellant constituted an adventure in the nature of trade and were in the course of a profit-making scheme. However, this case is distinguishable from the instant case on facts and particularly in view of the fact that in the cited case the assessee did not have resources to buy or cultivate the land himself and so divided the land into a number of plots and retained only one plot with himself and sold the rest all; there was also one of the terms of agreement that the assessee's vendor will execute the sale deed in favour of assessee's nominees. All these facts emphatically showed that by entering into the transaction the assessee had the intention of earning profits only.
31. In Khan Bahadur Ahmed Alauddin & Sons v. CIT (1968) 68 ITR 573 (SC), the assessee had purchased large areas of lands and buildings from government and resold parts of lands and buildings within short time. The assessee had taken loans to pay purchase money on interest far in excess of income from property. In the circumstances it was held that it was an adventure in the nature of trade and was in the course of a profit-making scheme. Obviously the decision is distinguishable on facts from the present case.
32. In Vitta Kristappa v. ITO (2005) 92 ITD 1 (Hyd) (TM), the assessee individual had purchased land from his HUF. He applied to Municipalities for approval of layout plan to convert land into 25 plots and duly paid conversion charges and licence fee and subsequently got approval. The assessee incurred expenses on levelling and demarcation, and sold 7 out of 25 plots. The assessee filed his return showing capital gains accrued on sale of above-mentioned plots. The assessee had submitted that the assessee had purchased land from HUF to set up an oil mill as he had good experience and after purchase of said land he came to know that, that land was not suitable for starting an industry for the reason that municipality did not permit setting up of industry in area as per master plan of municipalities. The assessee did not place any material on record to show that any attempt to set up oil industry on land in question was made and also no site plan or date on which action was initiated to set up industry in that plot or similar particulars relating to firm 'V' were placed on record. In the circumstances it was held that the property was purchased and sold under a well-thought out scheme to make profit, and, thus, it was a clear case of adventure in the nature of trade.
33. As seen above, we find that the assessee's transaction was the solitary transaction of assessee during the entire period of 16 years; after purchase of land/property the same was reflected in the assessee's books of account as investment/ asset; the assessee sold this land after a long intervening period of 16 years; no construction of building nor development activity as such was made, and the activity done was the removal of debris, levelling of earth and raising of boundary wall and the partnership deed dated 24-3-1994 clarified that the activity of assessee-firm was only with respect of letting out of property. The fact that the assessee's business activity also included 'effecting repairs and renewal to buildings and render allied service' speaks a lot to corroborate and establish the assessee's intention underlining its activities being of letting out the property. Such activities do not contradict/controvert the assessee's intention of investment and holding the property as capital asset as the same do well spell out the safeguarding, securing and preserving of the property and not necessarily a business activity till 25-3-1996 when the assessee made a move and took a material/substantive step of applying to BMC for commencement certificate and development permission reflecting the dominant intention to earn profits. In our opinion, considering all these facts, the nature of activity and the period involved along with all other facts and circumstances of the case, the discussions made by the authorities below together with the contentions raised by the rival representatives, as also the legal position emerging from various cited decisions, we find that the assessee's act of purchase of property in March, 1981 was only an investment in capital asset and the land/property was held by assessee up to 25-3-1996 as a capital asset and it was on 25-3-1996 or around thereto that the assessee converted its capital asset into stock-in-trade by making an application to BMC for commencement certificate and development permission, as has been held by learned CIT(A), and rightly so. As such, we agree and find no fault with the finding/ conclusion drawn by learned CIT(A) in para 6.3 of his impugned appellate order to the following effect "Therefore, the year ending 31-3-1996 is to be taken as the year in which the conversion of the asset into stock-in-trade took place. Under these circumstances, the assessing officer will have to compute the capital gain by working out the Fair Market Value as on 31-3-1996. The difference between the sale consideration realised on 19-1-1998, amounting to Rs. 56.2 crores and the Fair Market Value on 31-3-1996 as reduced by the admissible expenses (as already considered in assessment order) would constitute the business income. The capital gain computed as on 31-3-1996 and the business income computed as mentioned, would together form part of taxable income of the assessee."
This disposes of ground No. 1 in assessee's appeal together with ground No. 1 in revenue's appeal.
34. Ground No. 2 of assessee has not been pressed by the learned AR of assessee and so the same is dismissed accordingly.
35. Regarding ground No. 3, the learned AR of assessee has contended that the assessee had paid Rs. 50 lakhs to M/s. Lotess Trading Co. and Rs. 40 lakhs to M/s. G.K. Enterprises by way of compensation for vacating the property. He has contended that the payments were made through cheques and the supportive evidence was also furnished on record; and in this regard he has referred to pages 213 to 245 PB. As against this, the learned Departmental Representative has supported the orders of authorities below contending that the assessee could not establish the genuineness of payment and so the same was rightly disallowed.
36. We have considered the rival contentions as also the relevant material on record. From the perusal of record we find that the learned CIT(A) has elaborately discussed the matter pertaining to each of the two aforesaid recipients and has found the payments to be non-genuine. The learned CIT(A) has also found that M/s. Lotess Trading Co. was alleged to be sub-tenant of the tenant Shri John Paul Cornello whereas Shri Cornello denied this fact of sub-tenant of the recipient M/s. Lotess Trading Co. in his statement recorded under section 131 of the Act and even pleaded ignorance about the so-called sub-tenant. He has also found that the payment of Rs. 50 lakhs was not deposited in the bank account of M/s. Lotess Trading Co. but in the bank account of somebody else. We also find that the assessee did not avail of the opportunity to cross-examine John Paul Cornello. Similarly the learned CIT(A) also found that the cheque for payment of Rs. 40 lakhs allegedly made to M/s. G.K. Enterprises, proprietary concern of Shri T.S. Nikam, as compensation for their tenancy was not deposited in the account of Shri T.S. Nikam but in the, name of somebody else and soon after deposit the cash was withdrawn. Despite several letters the assessee did not furnish the address of M/s. G.K. Enterprises nor did the assessee furnished reply to the show-cause notice regarding anomaly of deposit of payment. The learned CIT(A) observed that this compensation payment was claimed to reduce the tax liability. As such, considering all the facts and circumstances of the case, we agree with the conclusion drawn by learned CIT(A) in this regard and so we decline to interfere with the impugned order of learned CIT(A) on this count.
37. Ground No. 4 of assessee pertains to charging of interest under sections 234A and 234B. The learned AR of assessee has submitted that this issue is consequential. The learned Departmental Representative has supported the orders of authorities below. Considering the rival contentions, we direct the assessing officer to accord consequential relief, if any, to the assessee.
38. Ground No. 5 of assessee is general.
39. Ground No. 6 of assessee is not an independent/separate ground but comprises ground Nos. 2 and 3, which have already been disposed of by us above and so no specific decision on this ground No. 6 is called for.
40. In the result, assessee's appeal No. 5687/Mum/2001 is partly allowed as indicated above.
41. As regards IT Appeal No. 03/Mum/2002 being revenue's appeal, the ground No. I has already been dealt with and disposed of by us above while dealing with inter-related ground No. 1 of assessee in assessee's appeal.
42. Ground No. 2 of revenue disputes the determination of Fair Market Value of the property as on 25-3-1996 by reverse indexation as has been done by learned CIT(A). The learned Departmental Representative has contended that determination of fair market value of property by applying reverse indexation has not been approved by 'E' Bench of ITAT, Mumbai, in the case of Shakti Insulated Wires Ltd. v. Jt. CIT (2003) 87 ITD 56. He has contended that for determination of Fair Market Value the learned CIT(A) should have restored the matter back to assessing officer to refer to DVO. As against this, the learned AR of assessee has contended that if for determination of FMV as on 31-3-1996 the matter is to be sent back to assessing officer, then instead of referring the matter to DVO, the assessing officer should consider the valuation report of Government approved valuer and determine the FMV and that the assessee will obtain the valuation report of Government approved valuer and furnish the same to assessing officer.
43. We have considered the rival contentions as also the relevant material on record. Considering all the facts and circumstances of the case, we direct the assessing officer to permit the assessee to obtain the Government approved valuer's report regarding valuation of this property as on 31-3-1996 and furnish the same before assessing officer, who will consider the same and determine the FMV in accordance with law. We order accordingly.
44. In the result, revenue's appeal No. 03/Mum/2002 is allowed in part as indicated above.