Indian Kanoon - Search engine for Indian Law

"6. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is correct in holding that sale of factory land at Guindy, Chennai gave rise to Capital Gain and not to business profit in spite of the fact that the transaction entered into by the assessee an adventure in the nature of trade."

26. We have already seen while deciding Gr.No.4 that the Assessee had two plants in the city of Chennai one at Guindy and the other at Thiruvottiyur. The Plant at guindy was closed and shifted to Tiruvottiyur. In respect of the land over which the Guindy plant was located, the Assessee had entered into a Joint Development Agreement with a builder. In the Return of income filed for the A.Y.2005-06 the assessee claimed that income from transfer of the land at Guindy, Chennai gave raise to income chargeable to tax under the head "Capital Gain". The Revenue however claims that the income in question gave raise to income under the head "Income from Business" as the Assessee by entering into a development agreement with the developer had carried out an adventure in the nature of trade. This is the dispute in Gr.No.6 raised by the Revenue.

27.2. Out of the total land area of 8.39 acres; the Assessee entered into an agreement for sale of land admeasuring 1.10 acres with Messrs Khivraj Motor Limited. The physical possession of the said 1.10 acres was transferred in F.Y.2003-04 and the gain arising there from was reported in the return for A.Y.2004-05 under the head "Capital Gains" in terms of Section 53A of the Transfer of Property Act, 1882 read with Section 2(47)(iv) of the Income-tax Act, 1961. In respect of the remaining area of 7.29 acres the Assessee entered into an Agreement on 07.12.2004 with Messrs. Khivraj Tech Park Pvt. Ltd., granting it rights of development and construction of new buildings at a consideration and on the terms and conditions specified therein. As per Article III of the said Agreement dated 07.12.2004, the obligation to develop the said land by constructing buildings thereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer solely at developer's own cost. The Assessee had, no obligation of any nature to perform any act, deed or thing for development and construction of the new buildings. Clause 9.1 of the said Agreement categorically provided that nothing contained in the agreement construed that there was a partnership business between the Assessee and the said developer or such agreement in any manner constituted an Association of Person. The said clause 9.1, categorically established that there was no JV between the Assessee and the developer in respect of the development' of the said property. In terms of the said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pvt. Ltd. on it's own account and profit or loss from the said venture was entirely to the account of the said developer. As per Para 3.2 all costs, charges, expenses for preparation and submission of the building plans and all costs, charges, expenses and outgoings for construction, erection and completion of the said building were to be borne and paid for solely by the Developer. In addition to incurring the cost of development and construction of the new buildings, the Developer was obliged to pay Rs.25 crores and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer. The agreement dated 07.12.2004 envisaged barter or exchange.. The sale consideration was taken by the assessee at Rs.25 crore plus estimated cost of construction of 218,500 sq. ft. of the constructed area in the proposed new building. The estimated cost of construction of 218,500 sq. ft. ofthe constructed area in the proposed new building was valued by a Registered Valuer vide its Valuation Report dated 18.03.2005 which comes Rs.1 050 per sq. ft. The property was acquired by the company prior to 01.04.1981 and therefore the fair market value of the property as on 01.04.1981 was taken as cost of acquisition u/s 55 of the Act. The same had been valued by a registered valuer vide his report dated 16.10.2004.

27.3. The AO called upon the Assessee to explain on 27.11.2007 as to why this should not be treated as business transaction instead of investment. The assessee submitted on 05.12.2007 & 12.12.2007 that the expression "business", though wider in it's connotation; requires an assessee's active participation in any organised and systematic activity. The expression business or adventure in the nature of trade, presupposes that the assessee has undertaken a venture whose outcome is not known and involves taking of risk. The expression "venture' connotates chance plus risk. Uncertainty about the return to be received from the investment made and facing many imponderables and even the risk of losing capital are inherent in the activity called as "business". On the contrary safety of the principal and regularity of the return are the principal attributes of Investment. The Assessee pointed out that since 1971-72, the factory land at' Guindy appeared in the Assessee's Balance Sheet as its "Fixed 'Asset" and not as "Current Asset". The said land never constituted Assessee's stock-in-trade. The Assessee never dealt in the said land or any part thereof as a dealer or a property developer. The Assessee also pointed that it can be seen from the past records that the Assessee has never carried on business of property dealings nor the Assessee has ever carried on construction and development of Real Estate as its business. In none of the past assessments any income has been assessed from Real Estate development activity as Assessee's business income. The property at Guindy was assigned in 1971 specifically for the purpose of setting up a manufacturing unit. All along since 1971 till the land was handed over to the Developer, the land. was used only for the purpose of carrying on manufacturing operations. The Assessee never dealt with said land as a dealer. The agreement with the Developer dated 07.12.2004 did not envisage active participation by the Assessee in the project execution. The company was not liable or obliged to undertake any risk attached with development and construction of new buildings. Under the said agreement the company was entitled only for defined consideration which was partly in cash and partly in kind. The Assessee did not stand to gain or lose more than what was agreed to be received under the agreement. Whether or not the developer made any gain or loss from the business of development and construction of the new buildings, the Assessee did not have any share in Profit or Loss of the project development work but was entitled to a defined consideration. None of the attributes associated with the expression "business" or "an adventure in the nature of trade" were associated in the company's said transaction with the Developer. The assessee also submitted that under the agreement dated 07.12.2004 the Assessee had only granted rights of development and construction to the Developer. The developer did not, however, undertake the construction of the buildings during the relevant year and the constructed area was not delivered. The agreement dated 07.12.2004 only set out terms and conditions which the developer was obliged to perform in future and during the F.Y. 2004-05 these conditions were not performed and fulfilled. There was no transfer of land as is known in general law and therefore no commercial gains can be assessed with reference to the Agreement dated 07.12.2004 which was to be performed substantially by the developer in future. Accordingly no business income can be assessed till the agreement was performed. The definition of the word "transfer" in Sec 2(47) is wider in its connation. The definition of "transfer" U/S 2(47) includes in its ambit even the transactions which under general law do not amount to "transfer" or "sale". In computing income under the head "Profit & Gains from business or profession" the "sale" has to be understood in the context of general law. In assessing business income definition of "transfer" as used in Sec. 2(47) cannot be invoked. On reference to Sec.2( 47) of the Act, the said definition is applicable only in relation to a "Capital Asset" and therefore can be invoked only when income is assessed under the head "Capital Gains". The Assessee pointed that in case of Development Agreement arising due to transfer of capital asset, the same would be covered under the provisions of sub clauses (v) & (vi) of section 2(47) of the I.T.Act, 1961.

(v) In respect of the remaining area of 7.29 acres the Assessee entered into an Agreement on 07.12.2004 with Messrs. Khivraj Tech Park Pvt. Ltd., granting it rights of development and construction of new buildings at a consideration and on the terms and conditions specified therein. As per Article III of the said Agreement dated 07.12.2004, the obligation to develop the said land by constructing buildings thereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer solely at developer's own cost. The Assessee had no obligation of any nature to perform any act, deed or thing for development and construction of the new buildings. Clause 9.1 of the said Agreement categorically provided that nothing contained in the agreement construed that there was a partnership business between the Assessee and the said developer or such agreement in any manner constituted an Association of Person. The said clause 9.1, categorically established that there was no JV between the Assessee and the developer in respect of the development' of the said property. In terms of the said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pvt. Ltd. on it's own account and profit or loss from the said venture was entirely to the account of the said developer. As per Para 3.2 all costs, charges, expenses for preparation and submission of the building plans and all costs, charges, expenses and outgoings for construction, erection and completion of the said building were to be borne and paid for solely by the Developer. In addition to incurring the cost of development and construction of the new buildings, the Developer was obliged to pay Rs.25 crores and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer.