Income Tax Appellate Tribunal - Mumbai
Preeti Enterprises, Mumbai vs Department Of Income Tax on 24 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES " C ", MUMBAI
BEFORE SHRI DINESH KUMAR AGARWAL, J.M.
AND SHRI N. K. BILLAIYA, A.M.
ITA No. : 6214/Mum/2010
Assessment Year : 2007-08
ACIT-18(2), M/s. Preeti Enterprises
Room No.115, 1st Floor, 14B, Sushine Heights,
Piramal Chambers, Parel, P.L. Kale Guruji Marg,
Mumbai-400 012. Vs. Dadar (W), Mumbai-400 028
PAN NO: AABFP 1572 B
(Appellant) (Respondent)
Appellant by : Shri A. C. Tejpal
Respondent by : Shri Vijay Mehta
Date of hearing : 24.05.2012
Date of Pronouncement : 30.05.2012
ORDER
Per N. K. BILLAIYA, A.M.
With this appeal, the Revenue has challenged the correctness of the order of the Ld. CIT(A)-29, Mumbai dated 14.05.2010 for the A.Y. 2007-
08.
2. The grievance of the Revenue is that the Ld. CIT(A) has erred in directing the A.O. to treat the income of `.5,71,33,487/- as "income from long term capital gain" against the treatment of the same as "business income".
3. The facts giving rise to these grievance show that for the year under consideration, the assessee filed return of income at `.5,87,13,380/- on 2 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises 12.11.2007. The return was selected for scrutiny assessment. The detailed questionnaire along with the statutory notices u/s.143(2) and 142(1) were issued and served on the assessee. During the course of the assessment proceedings, the A.O. noted that the assessee has sold a property at Khetwadi, 10th X Lane, Mumbai and has shown the profits from the sale of the said property as "Long Term Capital Gain". The A.O. sought an explanation from the assessee why the capital gain declared should not be treated as business income specifically pointing to the object clause of the partnership deed dated 17.04.1986. According to which, the main object of the partnership include objects such as carrying on business as dealer, contractor, proprietor and the dealer in land, building, shops, office premises and godown etc. According to the A.O., the activity of selling the building during the year under consideration is nothing but a business activity and accordingly any profit derived should be treated as "profit from business" and not "Long Term Capital Gains".
3.1 In response to the show cause notice, the assessee replied that the partnership firm has two partners who are husband and wife. The firm purchased a property at Khetwadi on 15.11.1997 which consist of tenements occupied by 72 tenants for a consideration of `.60,00,000/-. The main intention of the assessee to purchase this property was investment and also to get rental income as the partners were getting older and older. It was also pointed out by the assessee that the partners have mutually agreed to change the objects of the firm in 1994. It was also clarified by the assessee that the partners have resolved to discontinue the business and replace the same with the objective of investment in the real estate or other investment in which the benefits of receiving the income from such investment as well as appreciation in the investment is more. On the allegation of treatment of income as "business 3 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises income", the assessee vehemently objected that if the business would have been the object, the assessee would not have waited for such a long period. The property was purchased in 1997 and it was sold in 2006, after 9 long years. The assessee had done nothing on the said property. The submissions made by the assessee were rejected by the A.O. who relied upon the judgment of the Hon'ble Supreme Court in the case of Rajputana Textile Agencies Ltd. v. CIT (1961) 42 ITR 743 (SC), wherein the Hon'ble Supreme Court has held that when the purchase of shares is made with the intention of the selling , it is an adventure in the nature of trade and such intention has to be reduced from the facts and the circumstances of the case. The A.O. also relied upon the judgment of Hon'ble Bombay High Court in the case of A. P. Damodara Shenoyvs CIT reported in 26 ITR 650 wrongly mentioned as 261 ITR 650, in which the Hon'ble Court has held that "What constitutes continuity is not necessarily the length of time during which the operations continue" and on relying on other decisions, the A.O. finally concluded that the assessee's activity in relation to the so called "Long Term Capital Gain" is inherently and in essence a clear business activity or a activity taken to an adventure/enterprise of business. Hence the assessee's income from the so called Long Term Capital Gain is treated as "income from business and profession". The assessment was completed at `.5,87,13,380/-.
4. The matter was taken before the Ld. CIT(A). The assessee reiterated its stand that the partnership so constituted on 17.04.1986 has undertaken only one project and even that project was completed in 1994. Thereafter, the assessee did not had any business, as the partners realised that, dealing in real estate is not their cup of tea and correctly decided to discontinue the business and change the objects from dealing in real estate to investment in properties or other investment to fetch rental income or other income regularly.
4ITA No : 6214/Mum/2010 M/s.Preeti Enterprises 4.1 After considering the facts and the arguments and the submissions made by the assessee, the Ld. CIT(A) held that the income offered by the appellant has to be treated as "income from capital gains". The findings of the Ld. CIT(A) were based on the following facts :-
"(a) Although the appellant firm had in its objective clause, the objects of developing properties, there is no evidence of any business activity carried on for the last nine years. In fact there are neither any employees nor any regular office of the appellant firm. The only activity that has been done by the appellant firm are in relation to the property are that three applications have been m1ade to various Government Departments, such as BMC, MHADA for NOC. There is no bar for a firm carrying out business activities to hold property as investment. Frequency of transaction is a basic rule in order to arrive at a conclusion that whether a certain activity is business activity or not. In this case there has been no activity for a period of 9 years.
(b) The firm did not maintain any regular books of accounts.
It did not disclose any business income. At the time of selling the property the return for earlier years were filed disclosing meager rental income. This income has been assessed by the assessing officer under orders under section 143(3) as a rental income and not as business income. There is no carried forward business loss, there are no routine business expenses, there is no business income either for several years.
(c) There was no closing or opening stock of trade. Hence there is no evidence to show that property was held as stock in trade.
(d) The two partners of the firm were an old ageing couple in their late 60s and could not have thought of pursuing any sustained business activity. There is no evidence at all that any organized business activities were carried on.
(e) There is no borrowal of funds or payment of interest except for small claim of LIC loan taken by one of the partners.
(f) The agreement for sale dated 12.12.2006 also specifies that appellant has not entered into any development 5 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises agreement with any other entity on earlier occasion for the said property (Page 6 of the agreement).
(g) The cases cited by the Assessing Officer explain general principles relating to the issue of business Vs. investment and do not exactly cover the case of the appellant. For regarding an activity as business there has to be a course of continued dealings with a profit motive. There has to be volume, frequency, continuity and regularity of transactions as explained by several court decisions. These criteria are absent in the case of the appellant.
In view of this the profit from the sale of property has to be assessed as long term capital gains and not as business income. The Assessing Officer is directed to assess the income from sale of property as long term capital gain and not as business income. This ground of appeal is allowed."
5. Aggrieved by this finding of the Ld. CIT(A), the Revenue is before us.
6. The learned DR strongly relied upon the assessment order pointing out towards two specific decisions considered by the A.O. i.e. 26 ITR 650 of Hon'ble Bombay High Court and 42 ITR 73 of Hon'ble Supreme Court. The DR argued that the assessee was into the business of developing and selling of properties since its inception and, therefore, it cannot be said that the transaction done by the assessee firm during the year under consideration resulted into the capital gains. DR finally concluded that this is nothing but an adventure in the nature of trade and the A.O. has rightly treated the income under the head "profits and gains from business and profession".
7. The learned counsel appearing for the assessee strongly objected to the submissions of the learned DR. He pointed out that the assessee has purchased the said property on 15.11.1997 which was occupied by 72 tenants and since then the assessee has been receiving the rental income from the tenants. The learned counsel drew our attention to the paper 6 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises book filed in this case by the assessee and specifically pointed out that from the A.Y. 2001-02 till the A.Y. 2006-07, the assessments have been completed u/s.143(3) of the Act and in all these years, the rental income derived from the said property has been accepted as income from house property by the department after thoroughly scrutinising the return and the computation of income for the relevant assessment year. The counsel further argued that the business activities were already closed in 1994 and the tenanted property was purchased in 1997 to earn income without any intention to carry on the business and for all these years, the assessee has neither appointed any staff nor it was having any organisation worth name, which clearly show that there was no continuity after 1994 when the assessee discontinue its business activity. Distinguishing the facts of the case from the decisions relied upon the learned DR, the learned counsel for the assessee pointed out that the decision of the Hon'ble Supreme Court in the case of Smt. Indramani Bai v. CIT (200 ITR 594) has no application in the facts of the case, as the Hon'ble Supreme Court was dealing with the issue of "adventure in the nature of trade" and not with the issue of "business". In the present case, the contention of the department is that the assessee is engaged in the business activity. However, the Hon'ble Supreme Court has observed in the facts of that case that holding period of piece of land was very short. Based on the facts and the circumstances of that case, it was opined that it was adventure in the nature of trade. The counsel further emphasised that in the aforesaid case, the Hon'ble Supreme Court has discussed the facts of the case and has really not laid down any general propositions to be applied to all cases. Further, distinguishing the decision of the case relied upon by the learned DR in the case of A.P. Damodara Shenoy vs. CIT [26 ITR 650 (Bom)], the counsel pointed out that in this case, the Hon'ble Bombay High Court was concerned with the matter of continuity to determine the business connection of the agent for the purpose of S.43 7 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises of the Income-tax Act, 1922. In the light of this, it can be inferred that this decision does not have even remote applicability to the facts of the present case.
8. Replying to one more decision relied upon by the DR is of the Supreme Court in the case of Rajputana Textiles (Agencies) Ltd. vs. CIT (42 ITR 743), wherein the Hon'ble Supreme Court was again dealing with the issue of adventure in the nature of trade. According to the counsel this does not have any applicability with the facts of the present case, as the Hon'ble Supreme Court has decided the aforesaid case purely on the facts of its own wherein the transaction of purchase and sale of 13,00,000 shares by the managing agent of the managing agency company was held to be adventure in the nature of trade. The learned counsel concluded that this decision would also not help the case of the Department.
9. We have heard the rival submissions perused the orders of the lower authorities and the submissions made during the course of the assessment proceedings and the paper book filed. The whole exercise by the A.O. revolves around the solitary fact that in the partnership deed dated 17.04.1986, the purpose of the firm was to carry on the business as builder, contractor and dealers in land buildings, shops, office premises, godowns, warehouses and industrial estates. We find that during the course of the assessment proceedings itself, the assessee has pointed out that the said business was discontinued after 1994. During the said period of the business activity, the assessee had undertaken only one project. Thereafter, the assessee has not done any activity except for purchasing the property at Khetwadi with 72 tenants in November, 1997. Even on this property, the assessee has done nothing for 9 years. Income from the said property was shown as "income from house property" which 8 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises has been accepted by the department in the scrutiny assessment starting from the A.Y. 2001-02 till 2006-07.
9.1 We also find that for the year under consideration on the one hand, the A.O. has treated the gains as "income from business" at `.5,71,33,487/-. The computation of such gain shows that the A.O. has grossly erred in taking the capital gains figure as computed by the assessee as income from business. This is more clear by considering the following statement of total income for the year under consideration :
STATEMENT OF TOTAL INCOME I. Income from house property (`.) (`.) Gross annual rent 72,650 Less : Municipal taxes paid 1,02,344 Income from house property (29,694) II. Long term capital gain As per separate working appended below 5,71,33,487 III. Income from other sources Bank interest 16,09,586 Total income 5,87,13,379 Rounded off 5,87,13,380 Summarized working of long term capital gain Sale consideration for sale of property 7,35,00,000 Less: Solicitor's fees 1,00,000 Net sale consideration 7,34,00,000 Less: Indexed cost of acquisition and 1,12,66,513 improvement Net gain 6,21,33,487 Less: Exemption u/s. 54EC:
Investment in Rural Electrification Corpn. 50,00,000 Bonds Taxable long-term capital gain 5,71,33,487
10. A perusal of the aforesaid statement of total income shows that in treating the business income, the A.O. himself has accepted (a) index 9 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises cost of acquisition , and (b) exemption u/s.54EC. The A.O. cannot blow hot and cold in the same breath. Reliance on the case of CIT vs. Suresh Chand Goyal (2008) 298 ITR 277 by the learned counsel is well founded. In this case, the Hon'ble Madhya Pradesh High Court has laid down that "An isolated transaction or activity can also be part of business, but to consider the question of business, there must be regular activity of purchasing and selling. In this case, there is nothing on record to show that the land was purchased for the purpose of selling into plots. Basically, it is a gifted land and the land was developed and was sold after converting into the plots with a view to secure the better price, therefore, the isolated activity cannot come within the purview of adventure in the nature of capital gain and, therefore, not assessable as income from business." Reliance was placed in the decision of Bangalore 'B' Bench of the ITAT in the case of Asha Housing Enterprises vs. DCIT Central Circle 1(1) (Bang) (2010) 127 ITD 94. In this case, the ITAT Bangalore held that "A firm involved in real estate business can hold land as investment and/or as stock in trade. This decision has to be taken only by the firm and its management and not by the Assessing Officer. The AO was not right to deem the asset of the firm to be stock in trade according to his whims and fancies. The firm would have various business plans and propositions by which it would have thought proper to hold the land as investments."
11. After considering the facts in totality and the case discussed hereinabove, we hold that the conduct of the A.O. by accepting the computed figure of long term capital gain as evidenced from the statement of the total income cited hereinabove show the lack of application of mind on the part of the A.O. The findings given by the Ld. CIT(A) are on the facts of the case. We do not find any infirmity or error in the findings of the Ld. CIT(A). Accordingly we hold that the income is to be taxed as 10 ITA No : 6214/Mum/2010 M/s.Preeti Enterprises "long term capital gains" as declared by the assessee. Accordingly the appeal is dismissed.
12. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on this 30th day of May, 2012.
Sd/- - Sd/-
( DINESH KUMAR AGARWAL ) ( N. K. BILLAIYA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, Dt: 30.05.2012
Copy forwarded to :
1. The Appellant,
2. The Respondent,
3. The C.I.T.
4. CIT (A)
5. The DR, - Bench, ITAT, Mumbai
//True Copy//
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Roshani