2015 (8) TMI 990 - HC - Income Tax

Sale of land - business income or capital gain - Tribunal held that the income from the sale of undivided share in land and sale of flats separately in different years cannot be subjected to computation of capital gains and said income is to be treated as business income - Held that - The respondent is an individual. Unlike the companies incorporated under the Companies Act, 1956, whose articles of association contain the object clauses, an individual need not necessarily confine his activity to a particular line of business. It is an admitted fact that the respondent was a partnership firm, which purchased the property only as a part of its business assets. Therefore, there cannot be a presumption that the respondent cannot carry on any activity other than that of manufacture and sale of pharmaceutical products. Hence, the Commissioner of Income Tax (Appeals) and the Tribunal were right in holding that the assessee was entitled to treat it as a business income. - Decided against revenue. Valuation report submitted by the DVO - reliance placed by the Assessing Officer under Section 69C - Tribunal held that the addition of difference in cost of construction based on DVO s valuation report made by the Assessing Officer under Section 69C cannot be sustained - Held that - The value adopted for the purpose of executing sale deeds to convey the undivided share of right in the land was only for the purpose of registration, which is evident from the fact that the guideline value was adopted by the assessee to register such documents. It is to be seen therefore that the consideration paid by the buyers of the apartments is wholesome consideration for a dwelling unit. The Assessing Authority has no case that the assessee had received any consideration in excess of the consideration reflected in the registered documents and in the books of accounts. No buyer has ever told the Assessing Officer that he has paid something more to the assessee than what was stated in the accounts. Therefore, there cannot be a case that the assessee had spent something more and realized something more from the buyers. When such a case is not possible, there is no basis for dissecting the superstructure from the wholesome transaction and attempt to adopt a different valuation for the said superstructure. The whole exercise of the Assessing Authority in this regard is irrational. We do not see anything wrong with the opinion of the Tribunal in this regard - Decided against revenue. Eligibility of benefit of deduction u/s 080IB - whether the Tribunal was right in holding that the assessee had developed the land to the extent of one acre and above to be eligible for the benefit of Section 80IB(10)? - Held that - The Tribunal has rightly pointed out that it is not necessary for the developer to convey the entire extent of one acre and above to the purchasers. If a property is lawfully developed by a buyer, one third (1/3) of the total extent of land should necessarily be reserved for public utility such as roads, etc. It is not possible for a developer to convey the entire land in favour of the purchasers, as he is obliged by the Town and Country Planning Act, 1971 and the Development Control Rules to leave spaces earmarked for public purposes. Therefore, this question has also been rightly answered against the Department by the Tribunal. - Decided against revenue.

Summary

Issues:
1. Whether the income from the sale of undivided share in land and sale of flats separately can be treated as business income or capital gains?
2. Whether the addition of the difference in cost of construction based on DVO's valuation report under Section 69C is sustainable?
3. Whether the assessee is entitled to deduction under Section 80IB(10) for developing housing units?
4. Whether the Tribunal's decision on the extent of land developed by the assessee for Section 80IB(10) benefit is correct?

Analysis:

Issue 1: The Revenue challenged the treatment of income from the sale of undivided share in land and flats as business income instead of capital gains. The respondent, a proprietor of a pharmaceutical business, sold land and flats. The court held that as an individual, the respondent was not limited to the pharmaceutical business and could engage in other activities. The Tribunal rightly treated the income as business income, not capital gains, as the land was initially a business asset. This decision impacted related questions for subsequent years.

Issue 2: The dispute involved the Assessing Officer's reliance on the DVO's valuation report under Section 69C for the assessment year 2003-2004. The Tribunal found the sale of flats to be a composite transaction, rejecting the separate valuation of land and construction. The Tribunal's decision was upheld, stating the consideration paid was for the entire project, not separate components. The Tribunal's reasoning was deemed rational, and the Department's claim was dismissed.

Issue 3: Regarding the entitlement to deduction under Section 80IB(10) for developing housing units, the Tribunal correctly noted that the developer need not convey the entire land to buyers. A portion for public utility must be reserved, as mandated by planning laws. The Tribunal's decision aligns with legal requirements, and the Department's challenge was rejected.

Issue 4: The Tribunal's determination on the extent of land developed by the assessee for Section 80IB(10) benefit was found to be appropriate. The Tribunal clarified the legal obligation to reserve land for public purposes, supporting the assessee's compliance with statutory regulations. Consequently, all appeals challenging these issues were dismissed, affirming the Tribunal's decisions.

In conclusion, the High Court of Madras upheld the Tribunal's decisions on the treatment of income, valuation report reliance, and eligibility for tax deductions, emphasizing compliance with legal provisions and dismissing the Revenue's appeals.