Income Tax Appellate Tribunal - Mumbai
Ashwin Ramesh Mansharamani vs Ito on 1 March, 2004
Equivalent citations: [2005]1SOT10(MUM)
ORDER
A.K. Garodia, A.M. This is an assessees appeal directed against the order of learned CIT (A)-XXXIX, Mumbai dated 28-11-1995 for assessment year 1992-93. Although, the assessee has raised as many as 11 grounds in the appeal, the only issue involved is whether the profit on sale of plots at Khandala is income from business or income from long term capital gain and allowability of exemption under section 54F as sale proceeds were duly inverted in purchase of a residential house.
2. Briefly stated, the facts of the case are that during the year, the assessee has declared in its return of income long-term capital gains arising on the sale of a plot of land at Khandala and also of shares. The assessee has also declared some amount of short-term capital gain also on account of sale of shares. The assessee has claimed that an amount of Rs. 8,40,900 is exempt under the provisions of section 54F. The assessing officer did not dispute the taxability of profit on sale of shares as long-term capital gain and short-term capital gain as declared by the assessee in its return of income, but regarding the profit earned by the assessee on sale of plot at Khandala, it was held by the assessing officer that the same is in the nature of business income and, accordingly, taxed the same as income from business and disallowed the claim of the assessee for exemption of Rs. 8,40,900 under section 54F. On appeal, the order of the assessing officer was confirmed by the learned CIT (A), and now, the assessee is in further appeal before us.
3. Learned authorised representative of the assessee submitted a chronology of events as per which, the assessee was born on 23-4-1967 and when the plot in question was purchased at Khandala on 12-1-1987 for Rs. 1,64,730, the assessee was of an age of less than 20 years. The assessee completed his graduation in June 1988 and also completed his Chartered Accountancy in the year 1989. He was married in the month of December 1990. The plot in question was sold by the assessee during financial year 1991-92 i.e., assessment year 1992-93 for Rs. 10,07,400 to pay for buying an interest in the flat which was occupied by him as a residence for himself and his wife, in 1993. The assessee obtained his law degree in the year 1994. The assessee became Director of family companies after completing his C.A. in the year 1989 and was carrying on business of financing and earning interest income. After narrating this chronology of events, it was contended by the learned Authorised Representative of the assessee that the case of the assessing officer. is that the land was purchased by the assessee with an intention to deal in real estate but at the time when the plot in question was purchased, the assessee was not even twenty years old and was engaged in his studies and therefore this is not correct that the plot was purchased with an intention to deal in real estate. At the time of sale of plot also, purpose of sale was to acquire residential house and, therefore, intention to deal in real estate was not present even at the time of sale of the plot. Our attention was drawn to para No. 4 of the assessment order as appearing on page Nos. 2 to 5 of the assessment order. It was contended that the assessing officer has jumped to the conclusion that the assessee was actively engaged in the transaction of land in the nature of trade on the following considerations as noted by the assessing officer :
(a) The assessee is a Director of a company M/s. Nazakat Estate and Trading (P) Ltd., Nerul.
(b) The assessee is a partner in M/s. Rustic Highlands Enterprises.
(c) The assessee has acquired 15 properties, majority of which are lands purchased from M/s. Rustic Highlands, Khandala.
(d) That a mere investor will keep only a couple of properties and not 15 as assessee has done.
(e) Activities of purchase and sale in this case is well organized and hence this is an adventure in the nature of trade.
(f) The assessee is a partner of the firm M/s. Rustic Highlands Enterprises, whose business consists of real estate development and the business carried on by the firm is tantamount to business carried on by the partner and, therefore, as per the assessing officer, the assessee is involved in the business of real estate development and sale. The assessing officer admits that the assessee himself has not improved the quality of land involved, but the plot has been developed by the firm in which he is a partner. And as per the assessing officer, the activities of the assessee as an individual and the activities of the firm where the assessee is a partner is the same.
(g) As per the assessing officer, it does not appear that the assessee has acquired this property for its own purpose and, therefore, it was inferred by the assessing officer that the properties acquired by the assessee were with an intention to trade only.
(h) The assessing officer has relied upon the judgment of the Honble Apex Court rendered in the case of G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC) and also on another Judgment of the Honble Apex Court rendered in the case of Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC) and the judgment of the Honble Apex Court rendered in the case of Raja J. Rameshwar Rao v. CIT (1961) 42 ITR 179 (SC).
4. It was further contended by the learned Authorised Representative of the assessee that the assessee was admitted as a partner of the firm when he was a minor and, therefore, there is no significance of it. It was also contended that only one plot was sold in this year and the two plots are sold in the next year, i.e., assessment year 1993-94 and the balance twelve plots are still held by the assessee as investment. There is no dispute that the assessee has purchased only the developed plots and no change was affected by the assessee after purchasing the plots. It was also contended that the assessee in his individual capacity is not a trader in land and if the firm in which the assessee is a partner or company in which the assessee is a Director, are engaged in the land transactions, there is no justification for holding that the assessee is a dealer in land. Regarding the sale of properties in earlier years, it was contended that profit on all such sales were offered for taxation and assessed also under the head capital gains in all the years prior to this assessment year. In the balance sheet also, the investment in property is shown as investment and not as stock in trade as can be seen on page Nos. 7 to 10 of the paper book. It was also contended that apart from 15 properties, the assessee has made investment in shares of so many companies also, the list of which starts from page No. 8 of the paper book-to the end of page No. 9 of the paper book. But the profit on sale of shares was accepted by the assessing officer as capital gain but for the profit on sale of land only, the assessing officer has held that it is not capital gain but is a business income. Reliance was placed on the Tribunal order in the case of Roshanlal Agarwal v. Asstt. CIT (2002) 123 Taxman (Mag) 47 (Mum-Trib), wherein it was held that the profit from sale of seven shops out of total 17 shops purchased should be treated as long-term capital gain. In support of the contention that sale of land in the facts and circumstances of the present case is not an adventure in the nature of trade, reliance was placed on the following Judgments of Honble jurisdictional High Court :
(a) Gopal C. Sharma v. CIT (1994) 209 ITR 946 (Bom)
(b) Indian Hume Pipe Co. Ltd. v. CIT (1992) 195 ITR 386 (Bom)
(c) Bhogilal H. Patel v. CIT (1969) 74 ITR 692 (Bom) Reliance was also placed in support of this contention on the Tribunal order rendered in the case Chawla Architects & Consultants (P) Ltd. v. Asstt. CIT (1995) 54 ITD 330 (Bom-Trib) and also on the judgment of the Honble Apex Court in the case of CIT v. P.K.N. Co. Ltd. (1966) 60 ITR 65 (SC).
5. Regarding the three judgments of the Honble Apex Court on which reliance was placed by the learned assessing officer i.e., in the case of G. Venkataswami Naidu & Co. (supra), in the case of Raja J. Rameshwar Rao (supra) and in the case of Saroj Kumar Mazumdar (supra), it was contended by the learned Authorised Representative that all these judgments are distinguishable on the facts and, hence, not applicable in the present case. It was contended that intention at the time of purchase and totality of facts are relevant for deciding the character of the income and for this purpose, reliance was placed on the following judgment/Tribunal orders :
(a) CIT v. H. Holck Larsen (1986) 160 ITR 67 (SC)
(b) CIT v. Principal Officer, Laxmi Surgical (P) Ltd. (1993) 202 ITR 601 (Bom)
(c) Arjun Kapur v. Dy. CIT (1999) 70 ITD 161 (Del-Trib).
6. As against this, it was contended by the learned Departmental Representative of the revenue that the totality of the facts and circumstances reveals that the transaction was in the nature of trade because there was land transactions in earlier years also. It was also contended that this is an admitted fact that the firm and company with which the assessee was associated, were doing business in real estate. It was contended that the borrowed fund was also invested and hence, intention is not for investment only. Regarding the intention at the time of purchase also, it was also contended that since borrowed funds were also invested, the intention was not for investment. It was also contended that the judgment in the cases of Indian Hume Pipe Co. Ltd. (supra) and Chawla Architects & Consultants (P) Ltd. (supra) relied upon by the learned Authorised Representative, are not applicable in this case because the facts are different as there was investment of surplus funds only in these cases, but in the present case, borrowed funds were also invested and hence the ratio laid down in these jdgments are not applicable in the present case. Reliance was placed on the order of the revenue authorities and it was contended that the totality of facts suggest that the transaction was in the nature of trade and hence, the order of the revenue authorities should be upheld.
7. In reply, it was submitted bhe learned Authorised Representative of the assessee that the profit in earlier years on purchase and sale of properties was assessed under the head capital gains and regarding the use of borrowed funds, it was contended that it was never a case of the assessing officer, that the assessee has no surplus funds and otherwise also, it can be seen that as per the balance sheet appearing on page No. 7 of the paper book, the assessees own funds are amounting to Rs. 41.16 lakhs, whereas the investment in properties is much below that, i.e., around Rs. 8-9 lakhs only. Our attention was drawn to the profit and loss account as appearing on page No. 6 of the paper book, and it was con tended that the assessee has not claimed any interest payment but in fact there is receipt on account of interest and, therefore, it was contended that this is not correct that the plots were acquired out of borrowed funds.
8. We have considered the rival submissions and perused the materials on record. We find that the assessee was engaged in his studies when the plots were purchased and sale of the plot in question in this year was also made for acquiring residential house only. This is also an admitted fact that the assessee has not made any changes to the plots after the same were purchased by him and out of 15 plots purchased in/till the year 1986-87, one is sold in this year, and two are sold in the next year but the balance 12 are still held by the assessee. The only basis on which the assessing officer has concluded that the assessee was engaged in the business of real estate is that the assessee is a partner in a firm and director of a company and both these firm and company are engaged in the real estate business, but we are of the considered opinion that this cannot be a basis to decide the nature of investment made by the assessee in his individual capacity. There is no bar on buying properties as investment even if the assessee himself is engaged in the business of dealing in properties and, therefore, it is essential to establish that the property in question was purchased for the purpose of dealing in property but from the facts of the case, we find that the property in question was sold after at least four years from the date of acquisition and out of balance 14 properties, only two were sold in the next year and remaining 12 are still held by the assessee. These facts does not suggest at all that the assessee was engaged in the business of dealing in real estate. We agree with the learned Authorised Representative that it was never the case of the assessing officer that the investment in property is made out of borrowed funds and from the f acts on record and the balance sheet also, it is not established that the investment in plots is made out of borrowed funds because there is a capital balance of more than Rs. 41 lakhs, whereas the investment in plots is less than Rs. 10 lakhs. From the judgment of the Honble Apex Court in the case of Raja J. Rameshwar Rao (supra) relied upon by the learned assessing officer and learned CIT (A), we find that the facts are different in this case from the present case. In this case the land was acquired and was sold after developing it but in the present case, there is no development activities undertaken by the assessee and hence the ratio laid down by the Honble Apex Court are not applicable in the present case. In another judgment of Honble Apex Court relied upon by the learned assessing officer and the learned CIT(A) in the case of G. Venkataswami Naidu & Co. (supra) also, we find that the facts are different in this case and in the present case. In this case, four contiguous plots of land adjacent to the place where the mills of the company managed by it were situated and these plots were purchased by the assessee knowing that it will be able to sell these lands to the managed company whenever it thought it profitable so to do; and under these facts it was held that the transaction in question was an adventure in the nature of trade, whereas in the present case, there is no such situation and the facts are totally different and hence, the ratio laid down in this case also, is not applicable to the present case. In another judgment of the Honble Apex Court in the case of Saroj Kumar Mazumdar (supra) relied upon by the learned assessing officer and learned CIT (A) also, the facts are different. Facts in this case are that, part payment for acquisition of property was made by the assessee out of loan from a company and the assessee was not in a position to make payment of the balance of the purchase price of the plot and had no means to construct a house, and under these facts, it was held that there was no investment but only excursion into the realm of trade. But in the present case, the facts are different, full payment was made by the assessee out of his own funds and, therefore, the ratio laid down by this judgment is also not applicable in the present case. We also find that the judgment of the Honble jurisdictional High Court rendered in the case of Indian Hume Pipe Co. Ltd. (supra) and order of the Mumbai Bench of the Tribunal in the case of Chawla Architects & Consultants (P) Ltd. (supra) are on the similar facts as in the present case and the issue was decided in favour of the assessee and respectfully following these judicial pronouncements, we hold that the profit earned by the assessee on the sale of plot at Khandala is income from long-term capital gain and we direct the assessing officer to tax this profit on sale of plot amounting to Rs. 8,42,670 as income from long-term capital gain and allow the claim of the assessee for exemption under section 54F if the conditions and requirements of section 54F are fulfilled by the assessee and for this purpose, the assessing officer should provide reasonable opportunity of being heard to the assessee to substantiate its claim for exemption under section 54F.
9. In the result, assessees appeal stands allowed with above direction.