Income Tax Appellate Tribunal - Delhi
Chandra Prakash Goel, New Delhi vs Ito, Hapur on 20 March, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'B' NEW DELHI
BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No. 3032/Del/2014
Assessment Year: 2010-11
Sh. Chandra Prakash Goel, C/o- Vs. Income Tax Officer, Ward-1,
M/s. RRA Taxindia, D-28, South Hapur
Extension, Part-I, New Delhi
PAN : AATPG4288R
(Appellant) (Respondent)
Appellant by Dr. Rakesh Gupta & Sh. Somil Agarwal,
Advocates
Respondent by Sh. Anil Kumar Sharma, Sr.DR
Date of hearing 02.03.2017
Date of pronouncement 20.03.2017
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 17/02/2014 of learned Commissioner of Income-tax (Appeals), Ghaziabad for assessment year 2010-11, raising following grounds:
1) That having regard to the facts and circumstances of the case, learned CIT-A has erred in law and on facts in confirming the action of learned A.O. in making addition of Rs.62,39,059/- under the head "income from business" by re-characterizing the capital gain as business income and that too as against NIL income by ways of "long term capital gain" as computed by the appellant in his return of income and impugned addition has been made by recording incorrect facts and finding and by disregarding the submissions/evidences of the assessee and without giving adequate opportunity of hearing.2 ITA No. 3032/Del/2014
AY: 2010-11
2) That in any case and in any view of the matter, action of Learned CIT-A in not assessing long term capital gain at NIL and by assessing the business income at Rs.62,39,059/- is bad in law and against the facts and circumstances of the case and that too by adopting wrong facts and figures.
3) That having regard to the facts and circumstances of the case learned CIT-A has erred in law and on facts in confirming the action of Learned AO in making aggregate disallowance of Rs.3,90,000/- under the head expenses of soil and pathai and that too without giving adequate opportunity of hearing and without bringing anything contrary on record.
4) That in any case and in any view of the matter, action of learned Commissioner of Income Tax (Appeals) in confirming the action of learned A.O in making aggregate disallowance of Rs.3,90,000/- under the head expenses of soil and pathai is beyond jurisdiction, illegal, bad in law and against the facts and circumstances of the case.
5) That in any case and in any view of the matter, action of learned Commissioner of Income Tax (Appeals) in confirming the action of learned A.O. in making the impugned addition/disallowance and framing the impugned assessment order is contrary to law and facts, void ab ignition, beyond jurisdiction, and without giving adequate opportunity of hearing, by recording incorrect facts and finding abnd the same is not sustainable on various legal and factual grounds.
6) That having regard to the facts and circumstances of the case, learned CIT(A) has erred in law and on facts in not reversing the action of learned A.O. in charging interest u/s 234A, 234B and 234C of Income Tax Act, 1961.
7) That the appellant craves and leave to add, modify, amend or delete any of the grounds of appeal in the time of hearing and all the above grounds are without prejudice to each other.
2. The facts in brief of the case are that the assessee, an individual was engaged in carrying on business of manufacturing and sale of bricks under the name and style of M/s Chandra Brick Field, Hapur. During the year under consideration, the assessee sold a portion of agriculture land, which was purchased in the year 1977. The assessee converted agriculture land into residential plots, built service road and developed a colony, namely, "Prahlad Nagar" and during the year sold few plots to 3 ITA No. 3032/Del/2014 AY: 2010-11 different person on different dates. For the year under consideration the assessee filed return of income on 09/09/2010, declaring total income of Rs.2,87,080/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. The assessment was completed at total income of Rs.69,16,140/- on 26/03/2013 under section 143(3) of the Act after making additions/disallowances. Aggrieved, the assessee filed appeal before the Ld. Commissioner of Income-tax (Appeals), but could not succeed. Now, the assessee is before the Tribunal raising the grounds as reproduced above.
3. In ground Nos. 1 and 2, the assessee has challenged the action of Ld. CIT-A in confirming the addition of Rs.62,39,050/- treating the sale of part of agriculture land as business income as against claim of the assessee under the head "capital gain". Facts in respect of issue in dispute are that the assessee purchased an agriculture land measuring 14,873 square yards in 1977 in village Patna, which is situated within municipal limits of Ghaziabad. In the year under consideration, the assessee converted the agriculture land into residential plots, built service roads and developed the entire property in the name of a colony, namely, 'Prahlad Nagar'. According to the assessee during the year, he sold plots measuring 4665 square yards for sale consideration of Rs.66,50,000/- and built service roads having area of 1100 square yards during the year. The assessee claimed expenses of Rs.4,00,300/- towards development/sales of plot. According to the Assessing Officer, the assessee sold plots having area 4665 square yards and 1476 square yards covered by service roads. According to the assessee, the entire property was sold in three assessment years having details as under:
4 ITA No. 3032/Del/2014AY: 2010-11 Assessment Land Land used Total Sale Exp. Of Year Sold for land consideration sale Development used 2010-11 4,665 1,100 5,765 6,650,00 400,300 2011-12 6,035 1,423 7,458 10,178,500 251,840 2012-13 604 142 746 1,274,000 25,480 Total 11,304 2,665 13,969 18,102,500 677,620 3.1 The assessee computed capital gain on sale consideration of Rs.66,50,000/- and claimed exemption for the amount deposited in capital gain account.
3.2 According to the Assessing Officer, the entire activity of converting the agriculture land into residential plots, constructing service roads and sale of plots constituted an activity as business in the nature of trade.
The Assessing Officer computed the proportionate cost of acquisition of the land which was sold during the year at Rs.1,890/-. He took this amount as cost of acquisition as 01/04/1981 and after indexation computed the indexed cost of the land at Rs.10,641/-. The Assessing Officer added the expenses of Rs.4,00,300/- incurred for development of colony etc. to the indexed cost of land i.e. (Rs.10,641 + Rs.4,00,300/-= Rs.4,10,941/-) and after subtracting the said total amount from the sale receipt of Rs.66,50,000/- he computed net business income being adventure in the nature of trade at Rs.62,39,059/-. 3.3 Before the learned CIT-A, the assessee claimed that agricultural land i.e. the asset was acquired way back in 1977 i.e. 32 years back for business use and continuously used for business since then till the decision was made to sell it and as neither the assessee had acquired the land with the view to selling it later after developing it nor his activity can be described as a business income.
3.4 Alternatively, the assessee also submitted that if the assessee had carried on adventure in the nature of business, then capital asset was 5 ITA No. 3032/Del/2014 AY: 2010-11 required to be converted into a stock in trade in terms of section 45(2) of the Act. The assessee got valuation report from approved valuer for cost of acquisition as on 01/04/1981 and fair market value of the land on the date of conversion of stock in trade for its business of real estate in the financial year 2009-10 (corresponding to the assessment year concerned). The assessee computed the long-term capital gain on conversion of capital asset into plots and business income on sale of the plots during the year as under:
Capital Gain computation:
Consideration of Land Sold During the Year 72,06,250.00 (F.M.V.) (1250*5765) Less: Indexed cost of 58,29,568.00 acquisition(160*5765*632/100) (Cost inflation index for year 2009-10 is taken) Gross: LTCG 13,76,682.00 Less: Exemption for Investment in Capital 11,94,000.00 Gain A/c =1376682*6250000/7206250 Taxable Capital Gain 1,82,682.00 Business Income Calculation:
Sales consideration of converted plot 66,50,000.00 Less: Cost of such land (treated as stock after conversion) (F.M.V.) 72,06,250.00 Gross Business Income (Loss) (-)5,56,250.00 Less: Expenditure on sale of plots 4,00,300.00 Net Income (-)9,56,550.00 3.5 The learned CIT(A) did not accept the above contention of the assessee on the ground that the valuation report dated 25/05/2013 was filed first-time before him subsequent to the completion of the 6 ITA No. 3032/Del/2014 AY: 2010-11 assessment, but no request for admitting this additional evidence under rule 46A of the Income Tax Rules, 1962 was made before him. The Ld. Commissioner of Income Tax (Appeals) confirmed the action of the Assessing Officer relying on the judgment of the Hon'ble Supreme Court in the case of Raja J Rameshwar Rao Vs. CIT (1961) 42 ITR 179(SC) .
He referred the observation of the Hon'ble Supreme Court that "where a person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as he bought but in parcels, he is dealing with land as his a stock in trade; he is carrying on business and making a profit ......" and said that in the instant case also the assessee acquired the land in bulk and sold it in small pieces creating amenities like roads etc, and thus the transactions was an adventure in the nature of the trade.
3.6 Before us, the Ld. AR submitted that the land in question was purchased 32 years back as capital asset and in the year under consideration it was divided in pieces and sold. He said that assessee had not acquired the land with an intention to sell it later after developing it, thus it was merely a sale of capital asset and not an adventure in the nature of trade. In support of the contention he relied on the decision of the Hon'ble High Court of Rajasthan in the case of CIT Vs. Sohan Khan 304 ITR 194(Raj), decision of the Hon'ble Madhya Pradesh High Court in the case of Commissioner of Income Tax Vs. Suresh Chander Goyal, 298 ITR 277 (MP), decision of Tribunal, Ranchi SMC bench in the case of Rajesh Kumar Kabra Vs. ITO , 93 TTJ 252.
3.7 Alternatively, the Ld. AR also submitted that even if the contention of the Revenue that the assessee had carried on adventure in the nature of business, is accepted then the capital asset is required to be converted into a stock in trade in terms of section 45(2) of the Act and the gain arising on such conversion was to be treated as capital gain and 7 ITA No. 3032/Del/2014 AY: 2010-11 subsequent profit on sale of stock in trade was to be treated as business income. He referred to the computation of capital gain submitted before the Ld. CIT-A. He further submitted that assessee has already invested in the capital gain account scheme and thus assessee was entitled for exemption accordingly.
3.8 On the contrary, the Ld. Senior DR, relied on the finding of the authorities below.
3.9 We have heard the rival submissions and perused the relevant material on record. The undisputed facts in the case are that the land in question was purchased in the year 1977 and as submitted before the Ld. CIT-A by the assessee, it was purchased for business use and continuously used for business since then till the decision was made to sell it. During the year, the assessee converted the said land into residential plots and built service road for approaching those plots. In subsequent two years also the assessee incurred expenditure on construction of roads or development of land and sold the residential plots. The assessee developed the entire area of land in the form of a residential colony called " Prahlada Nagar" .
3.9.1 In the present case the issue involved is whether the entire transactions of purchase of agriculture land and subsequent resale of developed residential plots constitute an activity of adventure in the nature of trade or merely a sale of capital asset and alternatively, whether the conversion of agriculture land into residential plots should be treated as conversion of capital asset into a stock in trade liable for 'capital gains' under section 45(2) of the Act and subsequent profit on sale of plots as business profit liable for tax under the head 'profit and gains of business or profession'.
8 ITA No. 3032/Del/2014AY: 2010-11 3.9.2 First, we examine whether the entire transaction of purchase of agriculture land and subsequent sale in the form of residential plots, is as an adventure in the nature of trade.
3.9.3 The Ld. AR argued that the transaction was not an adventure in the nature of the trade because at the time of purchase of the land there was no intention to resale it at a profit. For the proposition that existence of intention to sale the property at profit, is essential for holding the transaction as adventure in the nature of trade, the Ld. AR relied on the judgment of the Hon'ble High Court of Rajasthan in the case of CIT Vs. Sohan Khan (supra). In the said case, Hon'ble High Court relied on the decision of the Hon'ble Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC).
3.9.4 In that case, Hon'ble Supreme Court said that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction as adventure in the nature of trade or capital gain. Further the Hon'ble Supreme Court made a general observation that if a person invest money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be clear case of capital creation and not profit derived from an adventure in the nature of trade. Further, the Hon'ble Supreme Court proposed to examine existence of various factors as follows in cases of realization of investment consisting of purchase and resale for deciding whether the transaction is an adventure in the nature of trade:
(i) whether the purchaser a trader and whether the purchase of the commodity and its resale, allied to his usual trade or business or incidental to it;
(ii) nature of commodity purchased and sold and its quantity purchased and sold;9 ITA No. 3032/Del/2014
AY: 2010-11
(iii) whether the purchaser by any Act subsequent to the purchase improve the quality of the commodity purchased and there were made it more readily saleable and;
(iv) whether the incident associated with purchase and sale are similar to operations usually associated with trade or business
(v) whether the transaction of purchase and sale repeated 3.9.5 The Hon'ble Supreme Court observed that the presence of all the relevant circumstances mentioned or any of them may help the court to draw an inference but it is not a matter of merely counting the number of facts and circumstances, pros and cons and what is important to consider is the distinctive character. In each case, it is the total effect of all the relevant factors and circumstances that determines the nature of the transaction.
3.9.6 Thereafter, regarding intention to sell with profit, the Hon'ble Supreme Court observed that the presence of such intention is no doubt a relevant factor and unless it is offset by presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The Hon'ble Supreme Court then held that the decision about the character of a transaction in the contexts cannot be based solely on the application of any abstract rule, principal test and must be in every case depend upon the relevant facts and circumstances.
3.9.7 In the case of Sureshchandra Goyal (supra), also the Hon'ble High Court of Madhya Pradesh held the issue whether the converting of the land into plots and subsequent sale would be capital gain or 10 ITA No. 3032/Del/2014 AY: 2010-11 adventure in the nature of the trade, is a question of fact. In the said case tax effect involved was less than Rs. 2.00 lakhs and the appeal was finally dismissed by the Hon'ble High Court in view of circular issued by the CBDT for not filing or withdrawing appeals in low tax rate cases. 3.9.8 In the case of Rajesh Kumar Kabra(supra), the Tribunal has examined the decision of the Hon'ble Supreme Court in the case of G Venktaswami Naidu & Co. (supra) and in the facts and circumstances of the case held the income from sale of land as liable for long-term capital gain.
3.9.9 Thus, we conclude that intention to acquire the land with a view to selling it later cannot be a sole criteria, for deciding whether the transaction is an adventure in the nature of trade and it depends on the other facts and circumstances coupled with the said transaction. 3.9.10 In the instant case, the assessee purchased land as capital asset for business use and continuously used for the business for 32 years prior to converting the same for residential purpose. After converting the land into residential plots, the assessee built service roads so as to make the plots saleable. The assessee also incurred expenses of more than Rs. 4 lakhs during the year for developing the land. The assessee also built service roads and incurred expenses in subsequent years for development of plot of land. For selling the plots of land, the assessee named the entire colony as Prahlad Nagar. There are multiple transactions of sales also.
3.9.11 All these facts and circumstances manifest that entire transactions of purchase of agriculture land and sale of developed residential plots in full, cannot be treated as sale of capital asset only. Simultaneously, the entire transaction also cannot be treated as adventure in the nature of the trade. In our opinion, the entire transaction need to be divided into two parts. The first part is purchase of agriculture 11 ITA No. 3032/Del/2014 AY: 2010-11 land and conversion of same into the residential plots. The second part of the transaction is development of the converted land and sale of those residential plots. In the alternative submission before the Ld. CIT-A, the assessee has also accepted that residential plots constituted stock in trade of his business of real estate in the financial year 2009-10 (i.e. financial year corresponding to the assessment year in consideration). All the facts and circumstances of the case also make it evident that the second part of transaction of the conversion of land into residential plots and sale thereof was an adventure in the nature of trade or a business activity and should be taxed under the head 'profit and gains of business/profession' and first part of the transaction becomes liable for capital gain tax in terms of section 45(2) of the Act, which reads as under:
"Capital gains.
45. (1) ............................................................................. (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."
3.9.12 The assessee also submitted computation of capital gain on first part of the transaction and business income from the second part of the transaction before the Ld. CIT (A). We find that evidences required for computation of capital gain were not requested by the assessee for admission as additional evidence and thus Ld. CIT-A did not decide the 12 ITA No. 3032/Del/2014 AY: 2010-11 submission of the assessee. In view of above circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer to compute capital gain in terms of section 45 (2) of the Act and business income from the transaction, in view of our finding above. While computing the capital gain, the Assessing Officer may examine the fare market value of the land in accordance with law. It is needless to mention that assessee shall be afforded sufficient opportunity of hearing. The grounds 1 and 2 of appeal are accordingly allowed for statistical purpose.
4. In ground No. 3 and 4, the assessee has challenged the action of the Ld. CIT-A in confirming the disallowance of Rs.3,90,000/- under the head expenses of soil and 'pathai'.
4.1 During the year assessee claimed expenses under the head 'soil' at Rs.4,52,480/- and under the head 'pathai' at Rs.10,37,992/-. According to the Assessing Officer, the assessee could not justify its claim except replying that the expenses were recorded and vouched. The Assessing Officer disallowed soil expenses of Rs.1,80,000/- and 'pathai' expenses of Rs. 2, 10,000/- totalling to Rs.3,90,000/-. Before the Ld. CIT-A the assessee furnished a comparative chart of expenses on soil and pathai of previous and subsequent year and he stated that expenses during the year under consideration were in comparative range. The relevant chart is reproduced as under:
Assessment Opening Sale Closing Productio Pathai % Soil % year Stock Stock n A B C D E=(A=B-C) F G=F/E H I=H/E % % 2009-10 0 1,415,503 2,076,470 3,491,973 524,300 15% 262,150 8% 2010-11 2,076,470 5,856,014 3,903,867 7,683,411 1,037,992 14% 452,480 6% 2011-12 3,903,867 7,055,151 5,988,933 9,140,217 1,067,390 12% 424,641 5% 13 ITA No. 3032/Del/2014 AY: 2010-11 4.2 The Ld. CIT-A did not accept the contention of the assessee and confirmed the disallowance.
4.3 Before us, the Ld. AR submitted that disallowance has been made on ad-hoc basis by the Assessing Officer and the same have been sustained by the Ld. CIT-A. He said the under the head 'soil', 40% of the total expenses have been disallowed, whereas under the head 'pathai' approximately 20% of the total expenses debited have been disallowed.
He submitted that disallowance made in arbitrary and ad-hoc manner, need to be deleted.
4.5 We have heard the rival submission and perused the relevant material on record. Before the Assessing Officer, the assessee could not justify its claim of relevant expenses except relying that same was recorded and vouched and comparable with similar cases. On perusal of the comparative chart furnished before the Ld. CIT(A), we find that expenses on soil and pathai varied from year to year and the assessee could not explain such variation in expenses. The assessee has not furnished any comparison of expenses with other entities engaged in similar activity. We also note that the expenses under respective heads are more in percentage terms compared to subsequent year but less as compared to last year. In view of the circumstances, we feel it appropriate to restrict the disallowance at the rate of 10% of the total expenses debited under the head 'soil' and 'pathai'. Thus, the addition to the extent of Rs.45,248/- under the head 'soil' and Rs.1,03,799/- under the head 'pathai' is sustained and the remaining addition is directed to be deleted. Accordingly, ground No. 3 and 4 of the appeal are partly allowed.
5. Ground No. 5 and 7 being general in nature are not required to be adjudicated upon specifically. Ground No. 6 is consequential in nature and hence not required to be adjudicated upon.
14 ITA No. 3032/Del/2014AY: 2010-11
6. In the result, the appeal is allowed partly for statistical purpose.
The decision is pronounced in the open court on 20th March, 2017.
Sd/- Sd/-
(AMIT SHUKLA) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 20th March, 2017.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi