Income Tax Appellate Tribunal - Chandigarh
Assistant Commissioner Of Income Tax vs Piccadily Hotels (P) Ltd. on 28 June, 2005
Equivalent citations: [2006]281ITR1(CHD), (2005)97TTJ(CHD)411
ORDER
S.K. Pransukhka, A.M.
1. The Revenue is in appeal against three separate orders all dt. 21st March, 2002 passed by the learned CIT(A) for asst. yrs. 1995-96, 1996-97 and 1998-99.
2. First common effective ground in all the appeals reads as under: Asst. yr. 1995-96 "In the facts and in the circumstances of the case, the learned CIT(A) in appeal No. 54 of 1999-2000 vide order dt. 21st March, 2002 has erred in directing the AO to assess the income from sale of shops under this head 'Capital gain' and work out the same by giving the benefit of indexation as per law which was assessed by the AO under the head 'income from business and profession".
2.1 Ground No. 2 for asst. yr. 1995-96 reads as under : "The CIT(A) has also erred in directing the AO not to charge interest under Section 234B and 234C of the IT Act which was duly charged by the AO in computation of income which is part of the assessment order."
2.2 Ground No. 2 for asst. yr. 1998-99 reads as under:
"The CIT(A) has further erred in deleting the addition of Rs. 16,54,000 which was made by the AO on account of brokerage."
3. Brief facts with regard to common effective ground No. 1 in all the appeals are that the assessee, engaged in the business of hotel and running a cinema hall, filed return on 30th Nov., 1995 declaring a total income of Rs. 10,14,026, which included loss under the head 'Income from house property' amounting to Rs. 6,91,234 and capital gains amounting to Rs. 25,26,443. During assessment proceedings under Section 143(3) of the IT Act, the AO found that in the assessment years under appeal, the assessee had shown sale of certain shop-cum-offices (for short SCOs) which it had acquired on 17th Nov., 1985 from M/s Swastik Construction, which was owned by its managing director and advance of Rs. 9 lakhs was paid. When asked to furnish copies of sale deeds, the assessee furnished allotment letter only in respect of one SCO which had been allotted originally. No allotment letter was furnished with respect to other SCOs. The AO, therefore, observed that the assessee had not paid the consideration for allotment of the property and substantial portion was paid by the ultimate investors/buyers. The AO further observed that the transactions had been entered into with the main objective of acquiring a hold on the property and after completing construction selling the same with the purpose of earning substantial profit. Accordingly, the AO treated the transactions of sale of the property as adventure in the nature of trade and treated the income under the head 'Profits and gains of business and profession' instead of 'Capital gain' as claimed by the assessee. While doing so, the AO relied on the decisions reported in the cases of Regent Estates Ltd. v. CIT (1963) 48 ITR 162 (Cal); Mrs. DM. Alexander v. CIT and G. Venkataswami Naidu and Co. v. CIT .
4. Before the CIT(A), it was submitted that the assessee was engaged in the business of running hotel and a cinema hall and does not carry business of real estate and never dealt in sale/purchase of immovable property. The assessee acquired these SCOs in the year 1985, held it for nine years and also disclosed in its balance sheet under the head 'investment'. It was pointed out that the assessee purchased the SCOs as per copy of the agreement entered into with the aforesaid concern, had taken actual possession on 17th Nov., 1989 and thus became its owner. It was further submitted that the sale/purchase of immovable property was never the intention of the assessee. The CIT(A) relied on the decisions in the cases of CIT v. H. Holck Larsen and Michael A. Kallivayalil v. CIT and directed the AO to treat the transaction as capital gain. The Revenue aggrieved.
5. Before us, learned Departmental Representative for the Revenue Shri Varinder Mehta mainly relied on the order of the AO. Learned Authorised Representative for the assessee Shri A.K. Jindal, on the other hand, relied on the impugned order and reiterated the submissions made before the CIT(A). Learned Authorised Representative took us to p. 11 of the paper book filed by the assessee, wherein it has been stated that the SCOs were acquired for expansion of the existing business. Learned Authorised Representative then relied on the decisions in the cases of CIT v. Nathalal Dahyabhai (1980) 126 ITR 555 (Guj), CIT v. Karam Chand Thapar and Sons Ltd. , Kaur Singh v. CIT and G. Venkataswami Naidu & Co. v. CIT (supra). Learned Authorised Representative submitted that the case of G. Venkataswami Naidu and Co. (supra) relied upon by the AO is in favour of the assessee. Learned Authorised Representative further submitted that the assessee has sold the same property in 1994-95 also, where the AO has accepted its plea and treated the transaction as capital gain and assessment was completed under Section 143(3); whereas in the years under appeal the AO has treated the income arising from sale of SCOs as business income.
6. We have heard both the parties, perused the orders of tax authorities and gone through the material available on record as well as the case law cited by the assessee. We find that the crux of the issue to be decided by us is whether sale of SCOs and profit arising therefrom is to be computed under the head 'Profits and gains of business and profession' or 'Capital gain' and whether the assessee held the property for the purpose of trade or for investment. It will be useful to go through the decisions relied upon by the AO first so as to draw an inference whether he was right in treating the income arising from sale of SCOs as business income instead of capital gain.
6.1 In the case of Regent Estates Ltd. (supra), the assessee, a property-owning company, entered into a forward contract with the Netherland Bank for the purchase of 90,000 dollars. The assessee did not take delivery on the due date, sold the said dollars to the same bank resulting in profit and the profit was treated as adventure in the nature of trade and accordingly taxed under the head 'Business income'.
6.2 In the case of Mrs. DM. Alexander (supra), the assessee who was a planter sold his main estate when he was in the employment of planting associations. Subseguently, he purchased a group of estates and within a few months thereafter sold the estates at a profit. The AO treated the difference between the purchase price and the sale price as income from business and assessed the same to income-tax. The High Court observed that the sale by itself would be not an adventure in the nature of trade, though the profit motive had actuated the sale. But then, the intention to resell at a profit would not by itself make a transaction of purchase and sale an adventure in the nature of trade. Though a dominant or even a sole intention to resell is not by itself conclusive proof, motive is a relevant factor in deciding whether the transaction of purchase and resale was an adventure in the nature of trade, and in conjunction with other circumstances including the conduct of the assessee, such an intention might well establish beyond doubt that the adventure was in the nature of trade.
6.3 In the case of G. Venkataswami Naidu and Co. (supra), on which the assessee also placed reliance in its favour, the assessee acquired some plots of land and sold within a short period. The Hon'ble Supreme Court opined that an adventure in the nature of trade clearly suggests that the transaction in question cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business by itself. It is characterized by some of the essential features that make up trade or business only but not only by all of them; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade, provided at least some of the essential features of trade are present in the isolated or single transaction.
6.4 It will be useful to go through the cases relied upon by the CIT(A) in the impugned order. In the case of H. Hoick Larsen (supra), the assessee undertook purchase and sale of shares and the transaction was held to be capital in nature. It was held that in order to determine whether one was a dealer in shares or an investor, the totality of all the facts will have to be borne in mind. If the transaction of purchase and sale was a business pursuit, profit would be definitely considered as business income. However, where the intention of the assessee at the time of acquisition of the property was not to resell the same immediately for profits but to earn profit therefrom, the assessee would be considered as an investor and the profit arising from the sale of property became his income from long-term capital gain and was assessable at a lower rate of tax. Such an intention was only one of the factors in deciding whether a particular asset was stock-in-trade or investment.
6.5 In the case of Michael A. Kallivayalil (supra), following principles were laid down to determine whether a particular transaction was an adventure in the nature of trade : (1) The intention or domain in transaction is relative factor to arrive at the conclusion whether a particular transaction is adventure in trade or not; (2) The facts and circumstances which led to draw a conclusion whether the transaction is genuine or not; and (3) The conduct of the assessee.
6.6 In the instant case, we find that the assessee acquired the property in the year 1985 and started selling the same in 1994-95, after a gap of nine years. The assessee has also shown this transaction as an investment in balance sheet. The assessee's main business is running of hotel and a cinema hall and not purchase/sale of immovable property. From the facts of the case, it becomes clear that assessee's intention was to hold the property as investment and not as a stock-in-trade. No prudent trader would sit on stock for so long. Also facts in the cited cases which have been relied upon by the AO are clearly distinguishable from the facts of the present case. We are also conscious of the decision in the case of CIT v. Dr. Indu Bala Chhabra . In the said case, the assessee derived income from the medical profession. During the course of assessment proceedings for asst. yr. 1991-92, the AO noticed that during the previous year the assessee had received a sum of Rs. 26.32 lakhs on the sale of some shops and flats but had not declared any capital gain on the plea that the sale consideration had been deposited in the specified capital gains bank account in terms of Section 54(2) of the IT Act, 1961. The AO held that the amount received by the assessee on the sale of the shops was to be charged to tax under Section 45(2) of the Act, as the assessee had converted her capital asset (the shops and flats) into stock-in-trade and the same were sold in the relevant previous year. The CIT(A) held that the construction of shops and the flats by the assessee was an adventure in the nature of trade and thus income from the sale of the shops was to be taxed as profits and gains of business, which were computed at Rs. 22,85,820. On appeal, the Tribunal held that the initial intention of the assessee was to hold the property as an asset for construction of a nursing home but subsequently after waiting for a period of three years and carrying out the construction for a period of three to four years, the assessee proceeded to dispose of a major part of the property in the asst. yr. 1991-92, that after making the purchase in June, 1980, it took the assessee a good period of 19-20 years to dispose of the property and in case it was meant to be a business proposition then no prudent person would have waited for such a long period to dispose of the property, that the surplus resulting from the sale had to be treated as capital gains and not as one arising from an 'adventure in the nature of trade'. On further appeal, the High Court held that the character of a transaction cannot be determined solely on the application of an abstract rule, principle or test but must depend upon all the facts and circumstances of the case. If the transaction is in the ordinary line of the assessee's business, there would hardly be any difficulty in concluding that it was a trading transaction. But where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. Substance of this decision further strengthens the case of the assessee in the sense that if the property was held for fairly long period, then the income arising out of it was to be taken as capital gain.
6.7 In view of the decisions discussed above, following principles emerge :
(1) Character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but depends upon the facts and circumstances of the case, i.e., whether a particular transaction is in the nature of trade or not;
(2) It depends upon the conduct of the assessee and the circumstances of the case, whether the venture is on capital or in the nature of trade. A transaction is not necessarily in the nature of trade because purchase was made with an intention to resale;
(3) Dominant motive is only relevant factor to determine the character of transaction; and (4) Motive can be expressed only on the basis of facts and circumstances, i.e., frequency of purchase and sale and other sources of income of the assessee.
Now, while these factors cannot also be conclusive but if these principles are applied in the instant case, we can come to a conclusion. As already discussed above, the assessee is engaged in running of hotel and cinema hall, he acquired the SCOs and kept them as investment for a long period of nine years before selling of in the relevant years. The CIT(A) also found that the SCOs were acquired by paying advance of Rs. 9 lakhs and the balance was paid in instalments and possession taken over. Also in para 5 above, we have mentioned regarding submissions of the assessee that in the asst. yr. 1994-95 the AO has treated the income from sale of SCOs as capital gain, whereas in the years under appeal he has changed his opinion regarding character of the transactions and also brought it under the head business income. Even on this plea, the assessee finds support that principle of res judicata does not apply to income-tax proceedings but to deviate from it there should be change in the facts and circumstances, as observed in the case of CIT v. Dalmia Dadri Cement Ltd. . Therefore, in view of the above discussion and totality of facts and circumstances of the present case, we are of the considered view that the CIT(A) was justified in directing the AO to compute the income arising from sale of SCOs under the head capital gain after necessary indexation. We uphold her order and do not find any merit in the common ground raised by the Revenue in all the three appeals. The ground stands rejected.
7. Coming to ground No. 2 for asst. yr. 1995-96, challenging the order of the CIT(A) in not charging of interest under Section 234B/234C, we find that relying on the decision in the case of CIT and Ors. v. Ranchi Club Ltd. , she directed the AO to delete the interest charged under Section 234B/234C, in the absence of mention of charging of interest in the assessment order. We find that there is no mention of charging of interest in the assessment order but we also do not have before us ITNS-150, which is part of the assessment order as claimed by the Revenue in ground of appeal. Therefore, we direct the CIT(A) to go through the record and find if there is any mention of charging of interest under Section 234B/234C in ITNS-150 and act accordingly to give effect to the principle of law.
8. Coming to ground No. 2 for asst. yr. 1998-99, the brief facts are that during assessment proceedings, the AO observed that while computing income, from house property the assessee had claimed Rs. 16.54 lakhs as commission paid to brokers for rental income. When asked to justify the allowability of commission paid to brokers, the assessee submitted that the commission was a charge from rental income. The AO, however, disallowed the commission. In first appeal, the CIT(A) allowed payment of brokerage/commission from rental income and accordingly annual letting value was reduced to the extent of the brokerage paid. The brokerage was paid to M/s Bausch & Lomb India Ltd. and M/s UES Sail Information Technology. The CIT(A) while allowing brokerage paid as rental income took the view that the assessee stood benefited due to the services rendered by the brokers and brokerage was a direct charge on rental income. Section 23(1) taxes the amount for which the property might reasonably be expected to be let from year to year or where the property is let out, the actual annual rent received/receivable was higher.
9. Before us, learned Departmental Representative relied on the order of the AO; while learned Authorised Representative relied on the impugned order and reiterated the submissions made before the CIT(A). Learned Authorised Representative further submitted that Annual Letting Value (ALV) of the property should be reduced by the amount of brokerage paid. He pleaded that Section 23(1), which lays down the law for determination of the property, stipulates that in Clause (b) of Sub-section (1) actual rent received or receivable should be considered to mean after deducing the expenses incidental to that. Learned Authorised Representative also submitted that in view of the decision in the case of CIT v. Sitaldas Tirathdas , which deals with overriding title that the amount of brokerage paid is having an overriding title over rent and hence to determine actual rent, amount of brokerage paid should be deducted. Learned Authorised Representative also pleaded that if the brokerage is to be deducted from ALV, it should be deducted against business income.
10. After hearing the rival submissions, we find that the issue to be decided before us is whether in computation of income from house property, annual value should be reduced by the amount of brokerage paid. For facility of reference, we reproduce hereunder the relevant portion of Clause 23(1) :
"23(1) For the purposes of Section 22, the annual value of any property shall be deemed to be--
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable."
From plain reading of the above, we do not find any express provision regarding allowance of any expenditure, brokerage, commission or by any one name, for determining ALV of the property. Rental income from property is assessed under the head 'Income from house property'. It will be pertinent to mention here that computation of income from different sources is done and taxed under five heads, i.e. (i) Income from salary; (ii) Income from business; (iii) Capital gains; (iv) Income from house property; and (v) Income from any other source. There are express provisions in each head for computation of income. Under the business head, actual expenditure is allowed on cash or mercantile basis, as per Section 28 to 43, while under the head 'Salary' only standard deduction is allowed. Likewise, under house property, only standard deduction is sought to be allowed under Section 24. Under the head 'Income from house property', ALV is computed on the basis of deemed rent, as per set formula enshrined in Section 23 and thereafter standard deduction is allowed under Section 24, as specifically provided under the Act. For computation of ALV, a formula has been enshrined in Section 23. Combined reading of Clause (a) and (b) leads to the inference about the words used 'actual rent received or receivable'. To distinguish expected rent, which is deemed in Clause (a), words 'actual rent received or receivable' have been put in Clause (b) and to infer that actual rent means net rent after allowance of expenditure in connection with rent will lead only to absurd conclusion contrary to the object of legislature. What is not expressly provided in the statute should not be thrust in own inference. More so, the statute does not empower the assessing authority or the assessee either to add or subtract anything from the ALV. In the case of CIT v. Gwalior Commercial Co. Ltd. , it was held that no account of expenditure incurred in connection with air conditioner, furniture, etc. should be added to the annual value. Conversely, it can be inferred that ALV is not to be disturbed which is coming out as a result of computation, as per formula under Section 23. Also the plea of the learned Authorised Representative regarding overriding title cannot be accepted as no obligation has been cast on the assessee to pay brokerage. Brokerage is one time expenditure for procuring the tenant. It is upto the assessee whether he needs the services of a broker or not. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Hence, on this account also the plea of the assessee fails. Also the assessee's alternative plea that the brokerage should be allowed to be deducted from the business income is not tenable in law, as the said brokerage is not paid for the purpose of its existing business. Law provides only the expenditure incurred wholly and exclusively for the purposes of business. Hence, on this account also, the plea of the assessee fails. Accordingly, we set aside the order of the CIT(A) in this regard and restore that of the AO by accepting the ground of the Revenue. The appeal stands partly allowed.
11. No other ground was either raised or pressed before us.
12. In the result, ITA Nos. 533 and 535 are partly allowed and ITA No. 534 is dismissed.