2013 (11) TMI 616 - AT - Income Tax

Adventure in trade - investment in land - conversion of land use from commercial to residential cum commercial - intention - Whether a single transaction of purchase and sale would constitute an adventure in the nature of trade - Intention in transaction - Held that - Since the initial intention was not to carry on business of development of plots and even thereafter the assessee had never intended to carry on the business of development of plots it requested the CIDCO to change the right of user of plot from commercial purpose to residential-cum-commercial purpose only with a view to utilise the property. Since the assessee could not successfully utilise the said plot of land it had to take a decision of assigning the rights to a third party by way of a tripartite agreement - Under the circumstances it cannot be stated that the assessee company was interested in carrying on activity of business in purchase and sale of property. It cannot even be stated as an isolated transaction of purchase and sale of property with an intention to make profit out of such transaction - Merely because the assessee makes some profit in a particular transaction it cannot be treated as an adventure in the nature of trade so long as the initial intention of a person was to hold the property and utilise it for a different purpose. In the peculiar circumstances of the case it can only be said that it is only a case of capital gain and not profit derived from an adventure in the nature of trade - assessee is justified in declaring the amount received from assigning its rights over the plot of land by a tripartite agreement is assessable to capital gains tax - Following decision of G. Venkataswami Naidu & Co. vs. CIT 1958 (11) TMI 5 - SUPREME Court - Decided in favour of assessee.

Issues Involved:
1. Whether the transaction of sale of plot of land at CBD Belapur is an adventure in the nature of trade or gives rise to capital gains tax.
2. Disallowance of expenditure under section 14A read with Rule 8D of the IT Rules.
3. Levy of interest under sections 234B and 234C of the Act.

Issue-wise Detailed Analysis:

1. Nature of Transaction:
The core issue is whether the sale of a plot at CBD Belapur by the assessee company should be treated as an adventure in the nature of trade or as a transaction giving rise to capital gains. The assessee company, engaged in the business of manufacturing cotton, manmade yarn, and fabrics, declared a loss of Rs.1.23 crores for the assessment year 2005-06. The property in question was initially leased from CIDCO for constructing a corporate office under the Corporate Shifting Scheme. The lease agreement stipulated that the land was to be used solely for constructing a corporate office, with limited rights to sell part of the built-up area.

The Assessing Officer (AO) treated the sale as an adventure in the nature of trade, arguing that the original intention was to utilize the property for business purposes, and thus, the income should be categorized under "Profits and Gains of Business." The AO cited various case laws to support this conclusion. The assessee contested this, stating that the intention at the time of acquiring the lease was to construct a corporate office, not to engage in property development or resale for profit. The first appellate authority upheld the AO's decision, emphasizing the sequence of events and the eventual sale to a third party as indicative of an intention to profit.

Upon further appeal, it was argued that the initial intention was not to trade in properties but to use the land for business purposes. The assessee's counsel referred to multiple case laws, including G. Venkataswamy Naidu & Co. vs. CIT, to argue that the intention at the time of purchase is crucial. The Tribunal concluded that the assessee's main business was manufacturing textiles, and there was no evidence of an intention to engage in property trade. The sale of the leasehold rights was due to the inability to use the property as initially intended, and thus, the transaction should be treated as giving rise to capital gains, not business income.

2. Disallowance of Expenditure under Section 14A:
The second issue pertains to the disallowance of expenditure under section 14A read with Rule 8D. The AO disallowed 10% of the dividend income, attributing it to expenses incurred for earning exempt income. The first appellate authority applied Rule 8D retrospectively, leading to a higher disallowance. However, the Tribunal noted that the Hon'ble Bombay High Court had reversed the decision of the ITAT Special Bench, which had applied Rule 8D retrospectively. Consequently, the Tribunal set aside the CIT(A)'s order and upheld the AO's original disallowance as reasonable.

3. Levy of Interest under Sections 234B and 234C:
The third issue involves the levy of interest under sections 234B and 234C, which was admitted by the assessee's counsel to be consequential. The Tribunal directed the AO to levy interest accordingly.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to compute the income from the sale of the plot under capital gains and upholding the original disallowance under section 14A. The levy of interest under sections 234B and 234C was deemed consequential.

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