Income Tax Appellate Tribunal - Hyderabad
Onkarmal Rambilas Inning&Pressing ... vs Department Of Income Tax on 10 March, 2001
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA No.776/Hyd/2010 : Assessment Year 2004-05
ITA No.777/Hyd/2010 : Assessment Year 2005-06
ITA No.778/Hyd/2010 : Assessment Year 2006-07
Income Tax Officer, Ward-1, V/s M/s. Omkarmal Rambilas Ginning
Adilabad and Pressing Factory, Adilabad.
( PAN- AAAFO 2877 P )
(Appellant) (Respondent)
And
Cross Objection No.32/Hyd/2010
(in ITA No.778/Hyd/2010) : Assessment Year 2006-07
Cross Objection No.46/Hyd/2010
(in ITA No.776/Hyd/2010) : Assessment Year 2004-05
Cross Objection No.47/Hyd/2010
(in ITA No.777/Hyd/2010) : Assessment Year 2005-06
M/s. Omkarmal Rambilas V/s Income Tax Officer, Ward-1,
Ginning and Pressing Factory, Adilabad
Adilabad.
( PAN- AAAFO 2877 P )
(Appellant) (Respondent)
Assessee by : Shri S.Rama Rao
Revenue by : Shri Sunil Babu K.E.
ORDER
Per Chandra Poojari, Accountant Member:
There are six matters in all in this Bunch. Three of them are appeals by the Revenue for the assessment years 2004-05 to 2006-07, which are directed against the common order of the CIT(A) VI Hyderabad 2 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad dated 10.3.2001. In the appeals of the Revenue, assessee has also filed cross-objections. Since common issues are involved, all these matters are being disposed off by this common order for the sake of convenience.
Revenue's Appeals:
ITA No.776/Hyd/2010 : Assessment Year 2004-05 ITA No.777/Hyd/2010 : Assessment Year 2005-06 ITA No.778/Hyd/2010 : Assessment Year 2006-072. Let us first take up for consideration, the appeals of the Revenue. Grounds of appeal of the Revenue, which are common in these three appeals, read as follows-
"1. The order of CIT(A) is erroneous both in facts and law.
2. The CIT(A) has erroneously relied on S.3 of A.P. Scheduled Areas Land Transfer 1959 as it stood before its amendment w.e.f. 04/03/1970.
3. The CIT(A) has erred in holding that the sale of plots is valid even though the transferees are not members of Scheduled tribe.
4. The CIT(A) erred in holding that the profits on sale of plots is to be assessed as capital gains instead of business income even though the transfer of such land is absolutely null and void. "
Thus, the main dispute in this appeal relates to the assessability of profit realized on sale of plots by the assessee to tax and the head under which the profit on sale of plots realized by the assessee is assessable.
3. Facts of the case in brief are that the assessee, a partnership firm carrying on activity of purchase and sale of kapas, owned 9 acres and 24 guntas of agricultural land in Echoda Village of Adilabad District, having been purchased originally by the father of the partner of the appellant firm, Shri Nandlal on 5.8.1969 from one Katham Ashareddy.
3 ITA No.776-778/Hyd/10and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad The said land was initially used for agricultural purposes. Though a part of the said land was utilized by the father of the partner upto the year 1979 for the purpose of running kandasari sugar factory, the said factory was demolished in the year 1980 and the movables were sold and thereafter the land was again put to agricultural operations by the partners of the firm and the father himself. From then onwards, the said land was used for agricultural purposes only. The business of the assessee-firm is at Adilabad. The said land was converted into the property of the assessee- 0firm by the partners. However, agricultural operations were conducted by the partnership firm, which was admitting income therefrom year after year under the head "agriculture". The partnership firm proposed to sell the land and though there were some restrictions on the transfer of the land because of litigation in respect of the land, the same was later resolved in favour of the assessee. Since the assessee was unable to sell the said land in its entirety, since no one came forward to purchase such a large extent of 9 acres and 24 guntas at Echoda, assessee-firm, in order to facilitate the sale of such land, divided the land into 219 plots and sold the said plots during financial years relevant to assessment years 204-05 to 2006-07.
4. Assessee filed the returns of income claiming before the Assessing Officer that the agricultural land is a capital asset within the meaning of S.2(14) of the Act and therefore submitted that the capital gain is exempt from tax. It was claimed in the alternative that the sale consideration was invested in the specified securities within the time stipulated by statute and as such it is entitled for exemption under S.54EC of the Act. Assessing Officer considered the explanation of the assessee and also referred the matter for directions to the Additional Commissioner of Income-tax Nizamabad under S.144A of the Act. It was pleaded by the 4 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad assessee before the Addl. Commissioner of Income-tax that the land was never converted into stock-in-trade but it continued to be agricultural land, and even if the income were to be determined as income from business, on the date of conversion of the agricultural lands into plots, the capital gain has to be worked out and the business income has to be separately determined. The Addl. Commissioner of Income-tax in his order mentioned that the property cannot be legally transferred in view of the provisions of A.P. Scheduled Areas Land Transfer Regulation 1959, since the Survey No.10, in which the land in question is located, falls in the agency tract and therefore, there is a prohibition on transfer of the land. He also held that when the transfer of land is not legally permissible, receipt on sale of such land is to be taxed as a casual and non-recurring receipt. He also held the view that provisions of S.45(2) for conversion of the capital asset into stock-in-trade do not apply. The Addl. Commissioner of Income-tax accordingly came to the conclusion that the income is assessable only as income from business. In accordance with the directions of the Addl. Commissioner of Income-tax, the Assessing Officer completed the assessment for the years under consideration, treating the income earned on sale of land as business income, vide orders of assessment dated 31.12.2008 for assessment year 2005-06 and 2006-97 and dated 30.3.2009 for assessment year 2004-05 passed under S.143(3) read with S.147 of the Act.
5. On appeal before the CIT(A), the learned counsel for the assessee filed elaborate written submissions, which the CIT(A) has extracted in ex-tenso in para 4.0 of his impugned order on pages 6 to 13 thereof. After due consideration of the same, he noted that the questions that arise for consideration before him as follows-
5 ITA No.776-778/Hyd/10and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad
(a) Whether transfer of the land is legally permissible or not;
(c) Whether the land is agricultural land or not;
(c) Whether the said land is a capital asset within the meaning of S.2(14) o the Act or not and whether the income derived by the assessee represents capital gain or income from business.
Addressing to the question at (a) above in the light of the A.P. Scheduled Areas Land Transfer Regulations, 1959 dated 4.3.1959, the CIT(A) held that though undisputedly the said Regulations are applicable to the Adilabad District, they place restrictions only on the transfer of immovable property by a member of the Scheduled Tribe. Taking note of the fact that none of the partners of the assessee-firm belongs to a Scheduled Tribe, and also the fact that the property was registered when purchased by the father of the partner of the assessee-firm, the CIT(A) concluded that the restrictions placed by the said Regulations are not applicable. Dealing with the next question at (b) above, the CIT(A) observed that the main of the assessee was to dispose off the property and to derive sale consideration without delay. He noted that the total receipts from the land have been received by the assessee in the following manner-
1) Assessment year 2004-05 (138 plots) Rs.62,85,000
2) Assessment year 2005-06 (8 plots) Rs. 4,00,000
3) Assessment year 2006-07 (1 plot) Rs. 50,000
Thereafter, the CIT(A) concluded in with regard to this question in para 5.4 of the impugned order as follows-
"5.4. The above explanation indicates that all the plots have been sold almost in one year except nine plots. Therefore, the appellant had no intention of retaining the plots for himself or to 6 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad carry on the business with the said plots. The Assessing Officer and the Addl. Commissioner of Income-tax mentioned that the A.P. Scheduled Areas Land transfer Regulation 1959 prohibited the transaction and therefore, the income is not assessable as a capital gain and as the said amount is not assessable as a capital gain and as the amount is not assessable as a capital gain it is assessable as income from business or income of casual nature. I have already held that in fact there is no illegality about the transfer of the property within the meaning of the said Regulations. The Assessing Officer also did not establish that the appellant with an intention to carry on the business converted the land into plots. As pointed out earlier, the appellant intending to sell the property, plotted it and transferred most of the property in one year. All the acts of the appellant indicate that the appellant had no intention to carry on the business activity and wanted to sell the property. I am also in agreement with the appellant that the property was divided into plots to facilitate the sale and to derive better price. Therefore, I hold that the transactions are assessable as income under the head "Capital gains" and not under the head "Business".
He sought to strengthen the above findings with the decisions of the Madras High Court in CIT T V/s. Kasturi Estates Pvt. Ltd.(62 ITR 578 ) and CIT V/s. Mahalingam Chettiar (107 ITR 237); and of the Madhya Pradesh High Court in the cases of CIT V/s. Dhananjay Jadhav (137 CTR 127) and CIT V/s. Suresh Chand Goyal(298 ITR 277). The CIT(A) accordingly held that the gain derived by the assessee on sale of plots is assessable as long term capital gains.
6. Taking note of the fact that the assessee deposited the amounts realised on the sale of plots in specified securities in accordance with the provisions of S.54EC, the CIT(A) held that the assessee is eligible for exemption under S.54EC of the Act and therefore, capital gain is not taxable. As for the question whether the land is agricultural land or not, the CIT(A) noted that notwithstanding the fact that since the capital gains is held to be exempt under S.54EC of the Act, the land was registered as agricultural land in revenue records and pahani patriakas, and the pass book issued by the revue authorities also corroborates with 7 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad the same. Having held that the sale of land in plots is only to facilitate the sale of the property and not with an intention to carry on the business, the CIT(A) has not decided the issue whether there was any conversion of land being capital asset into stock in trade as on 1.4.2003, on the ground that it was only of academic interest.
7. The CIT(A) accordingly concluded that the assessee is entitled for exemption under S.54EC of the Act, in respect of the capital gains on account of the amounts deposited in the specified securities.
8. Aggrieved by the above findings of the CIT(A), Revenue preferred its appeals, ITA Nos.776 to 778/Hyd/2010 before this Tribunal.
9. We have heard both the parties and perused the material available on record and we also gone through the AP Scheduled Areas Land Transfer Regulations 1959. These provisions are applicable when the property is transferred by the member of a Scheduled Tribe. In the present case, the party involved is not a person belonging to a Scheduled Tribe as such, and therefore, restriction placed on transfer of property by these provisions is not applicable. The impugned property was purchased by the father of partners of assessee firm in the year 1969. The original seller of the property Sri Kyatham Asha Reddy, from whom father of the partners of the assessee firm has purchased also does not belong to a Scheduled Tribe and the partners inherited the said property through will executed by their father. This land was subject matter of litigation before the Sr. Civil Judge, Adilabad due to petition filed by Shri K. Narayan Reddy s/o Shri Asha Reddy wherein it was decided that the land would belonging to the partners of the assessee firm though the partners paid a comprise amount of Rs.9 lakhs to Shri K. Narayan Reddy. Now the question is with 8 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad regard to the head of income under which the income derived on the sale of plots to be assessed whether it should be treated as capital gain or business income. Admittedly, the assessee in this case is in the business of purchase and sale of kappas and mainly getting income from pressing and ginning of cotton. It is having ginning and pressing factory at Adilabad. The assessee was never in the business of trading in immovable properties. The term 'business' is defined in Sec. 2(13) of the IT Act. The term 'capital asset' is defined in Section 2(14) of the Act. The test to decide whether it was an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transactions, some times can be deemed as investments. So, the criteria for deciding whether it is an investment or business is dependent on the intention of the assessee, viz., whether the assessee's real intention is to invest or the intention was in the nature of trade. In the present case, land was purchased by the father of the two partners of the firm in the year 1969. The said land was cultivated for agricultural purposes till khandasar sugar factory was established by him. Thereafter, it was utilized for establishing khandasari Sugar Factory which was run upto the year 1979. Later, the said factory was removed, the plant and machinery was sold and the land was again used for agricultural purposes. After the death of the father of the partners in the year 1984, both the partners being coparceners of the family formed a firm, there was some litigation with the original owners of the said land. The cost of litigation amounted to Rs.5 lakhs. Except the said amount of litigation expenditure, neither the firm nor the partners incurred any expenditure. The said land was used by the said firm for agricultural purposes. The firm admitted agricultural income upto the year 2003. It can be seen that till then the land continued to be the capital asset and was used only as capital asset. At no point of time, it 9 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad was converted into stock in trade. Most of the plots of land were sold during the financial year 2003-04 itself. Conversion of land into plots without any further development of the land is only with a view to realize the capital asset. As seen from the facts of the case, assessee's is not at all interested in carrying on the business of real estate. The assessee was holding the impugned property in the field of investment and it has no intention to trade in properties. The assessee did not carried on any development activities like laying the roads, drainage and sanitary connections. The assessee made division of the properties only with the intention to get good buyers since large properties are not easy to sell in the open market. The sole motive of making the plots is to facilitate easy sale and to realize best better price. The act of making the small plots without making any roads or drainage facilities cannot be construed as business activity. Since assessing officer has not brought on record any development on this property, the mere demarcation of the property as residential site cannot be construed as business activity. The impugned property cannot be a business asset in the hands of the assessee. The assessee had been carrying on the agricultural activities in the impugned property and offered agricultural income from the same to tax in earlier assessment years. Being so, the assessee correctly offered the income under capital gain.
10. The authorised representative of the assessee relied on the following judgements which support the assessee claim:
1. CIT Vs. Kasturi Estates (P) Ltd. (62 ITR 578)
2. CIT Vs. Mahalingam Chettiar ()107 ITR 237)
3. CIT Vs. Dhananjay Jhadav (137 ITR 127)
4. CIT Vs. Suresh Chand Goyal (298 ITR 277) 10 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad
5. CIT Vs. Smt. Radha Bai (272 ITR 264)
6. ITO Vs. D.N. Krishnappa (126 TTJ 140) (Blr.)
11. Before us, the learned Departmental Representative strongly relied on the order of the Ahemadabad Bench in the case of Smt. Nayanaben R. Desai Vs. ITO (315 ITR 19) (AT) (Ahemadabad) wherein it was held that:
"The assessee had used the plot of land in relation to her partnership business. The land was converted into stock in trade of the business. As the business of construction was done by the firm and the share of income received by her from the firm was duly shown as business income, the surplus generated on land which was owned by her in her individual capacity as a co-owner should be treated as business income only. The firm in which the assessee was also a partner used the land belonging to the assessee for the purpose of business. The assessee along with the others used the land for its business of construction and transferred the land as a business asset. Therefore, the surplus arising after the date of conversion was to be treated as business income. There was no material on record to show that the owner of the land had any intention before January 15, 1998 to convert the land into business property. Therefore, the surplus earned over the fair market value as on that date ought to be treated as business income of the assessee. As the fair market value of the land sold as on January 15, 1998, was not available on record the matter was to be restored to the file of assessing officer for recomputing the income after allowing a reasonable opportunity of hearing to the assessee. "
12. The facts of the above case relied by the learned Departmental Representative are entirely different from the facts of the present case. In the present case, the assessee held the property for such a long period as an investment in land and the assessee carried on the agricultural operation for such a long period, which shows that there is no intention to the assessee to trade in the said land. Development of land into residential plots with a view to get the best price, without doing anything more, is nothing but realization of a capital asset, and as such the surplus realized through the sale of plots is only capital gain and cannot be treated as business profit because the transaction is simply one 11 ITA No.776-778/Hyd/10 and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad of realization of assets held as investment rather than one realized in the course of trade carried on by the assessee or an adventure in the nature of trade. In our opinion, the CIT(A) is justified in holding that surplus on sale of plots should be assessed as capital gain and since the proceeds were invested in approved bonds u/s 54EC, assessee is entitled to exemption under this section. We accordingly uphold the order of the ita and reject the grounds of the Revenue in these appeals.
13. In the result, appeals of the Revenue are dismissed.
Cross Objections of the assessee:
14. The only grievance of the assessee in its cross objections relates to disallowances made by the Assessing Officer out of the business expenditure claimed by the assessee, which have been partially sustained by the CIT(A). For the assessment year 2004-05, while the Assessing Officer made a disallowance of Rs.39,000, the CIT(A) sustained the same to the extent of Rs.20,000/. For the assessment year 2005-06, while the Assessing Officer disallowed petty expenses of Rs.21,003; loss on kapas of Rs.27,850; expenses on ginning and preesssing labour of Rs.30,000; compound wall and godown repair expenses of Rs.20,000; factory expenses of Rs.20,000; and telephone expenses on account of personal user of Rs.10,795, the CIT(A) deleting all these additions made separately, directed the Assessing Officer to make an addition of Rs.40,000 only to cover all un-vouched expenses. Similarly, for the assessment year 2006-07, while the Assessing Officer made a disallowance of Rs.40,236, CIT(A) sustained the same to the extent of Rs.20,000.
12 ITA No.776-778/Hyd/10and CO Nos.32 & 46/Hyd/2010 M/s.Omkarmal Rambilas Ginning and Pressing Factory, Adilabad
15. We have heard both the parties on the above issue. Admittedly, significant portion of the expenditure claimed by the assessee as deduction is only supported by self-made vouchers. Since the expenditure is supported only by self made vouchers of the assessee itself and there is no corroborative external evidence in support of the expenditure, there is every possibility of inflation in the expenditure and there is also possibility of personal element in the expenditure. As such, reasonable disallowance out of the expenditure claimed is warranted. The CIT(A), in our considered opinion, is very reasonable in sustaining a small portion of the expenditure disallowed by the assessing officer in these years. Since the CIT(A) has taken a very reasonable view and sustained only small portions of expenditure disallowed by the assessing officer on the ground that they are supported by self made vouchers, we find no justification to interefere with the order of the CIT(A) on this aspect. Accordingly, on this issue, order of the CIT(A) for all the three years is upheld, and the grounds of the assessee in thee cross-objections are rejected.
16. In the result, Cross Objections filed by the assessee are dismissed.
15. In the result, appeals of the Revenue viz. ITA Nos. 776 to 778/Hyd/2010 as well as the Cross-Objections of the assessee, viz. C.O. Nos.32 & 46-47/Hyd/2010 are dismissed.
Order pronounced in the Court on 23. 9.2010
Sd/- Sd/-
(G.C. GUPTA) (CHANDRA POOJARI)
Vice President ACCOUNTANT MEMBER
Dt/- September, 2010
13 ITA No.776-778/Hyd/10
and CO Nos.32 & 46/Hyd/2010
M/s.Omkarmal Rambilas Ginning
and Pressing Factory, Adilabad
Copy forwarded to:
1. M/s. Omkarmal Rambilas Ginning and Pressing Factory, Near Old Bus Stand, Adilabad
2. Income-tax Officer, Wrd-1, Adilabad
3. CIT(A) VI Hyderabad
4. Commissioner of Income-tax VI, Hyderabad.
5. The D.R., ITAT, Hyderabad.
B.V.S.
1. Date of Dictation 2/7.9.2010
2. Date on which the typed draft is placed before the Dictating Member
3. Date on which the approved draft comes to the Senior P.S.
4. Date on which the fair order is placed before the 9.9.2010 dictating Member And other member
5. Date on which the fair order goes to the Sr. P.S.
6. Date on which the file goes to the Bench Clerk.
7. Date on which the file goes to the Head Clerk
8. Date on which the file goes to the Assistant Registrar
9. Date of the despatch of the Tribunal Order