2014 (2) TMI 1349 - AT - Income Tax

Gain from sale of the plots after claiming indexation benefit - income from business or LTCG - plot so sold constituted its stock-in-trade - correct head of income - HELD THAT - The ledgers of the assessee firm in books of the partners shows that the plots were introduced as a capital contribution by the said partner, and the said plots of lands were introduced as capital assets and have been so held and shown as investments in the books of accounts since many years in the past and such position were accepted in earlier years. We also found that plots no. 23B and 23C were held for more than 5 years. Plots no. 256 and 257 were held for more than 3 years 5 months .Had it been held as stock in trade, no developer would held it vacant for such a long period clearly indicate that they were held as investment with a motive to earn profits. All these aspects were not considered by lower authorities while reaching to the conclusion that plots were held as stock-in-trade and not as investment. Vide Tripatite Deed dt.03.08.2005 CIDCO formally transferred the said plots in favor of the assessee firm effecting the full transfer of the plots by Shri. Rahimtulla Abdul Hamid Mukri and others to M/s Sea Queen Developers. The transfer of the said plots were further formalized by CIDCO by transfer order dt. 19.09.2005. Subsequently, the said plots held as Long Term Capital Asset and shown as such in the balance sheets of respective years were transferred under an Agreement of Sale dt. 01.08.2008 to M/s Ravechi Properties on consideration of ₹ 10,55,00,00 and the capital gains of ₹ 8,26,04,800 after deducting the indexed cost of ₹ 2,28,95,200 was offered for taxation by the assessee firm. All these important factual aspects and documentary evidences have not been properly appreciated by lower authorities which resulted into wrong conclusion of holding that profit arising on sale of plots held as investment is liable to tax as business income rather capital gains. We set aside the orders of lower authorities and restore the matter back to the file of the AO for examining these documents in detail and for deciding afresh the taxability of profit arose on sale of plot as capital gains or as business income - Decided in favour of assessee for statistical purposes. Deemed dividend addition u/s 2(22)(e) - advances received by the assessee as deemed dividend - whether shares were held by the firm in the names of the partners - HELD THAT - No investment was made by the assessee firm in the shares of said SHIPL nor any shares were issued to the assessee firm which were held in the names of its partners. No merit in the action of Assessing Officer for applying provisions of Section 2(22)(e), when the assessee firm is neither a registered shareholder nor beneficial shareholder of shares of SHIPL. Accordingly, the Assessing Officer is directed to delete the addition made u/s 2(22)(e) of the Income-tax Act, 1961. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of long-term capital gains on the sale of land as business income.
2. Addition made on account of deemed dividend under Section 2(22)(e) of the I.T. Act.

Detailed Analysis:

1. Treatment of Long-Term Capital Gains on Sale of Land as Business Income:
- Facts and Arguments: The assessee declared long-term capital gains from the sale of certain plots, treating them as investments and claiming indexation benefits. However, the Assessing Officer (AO) treated these gains as business income, arguing that the assessee, being a builder and developer, held these plots as stock-in-trade.
- CIT(A) Decision: The CIT(A) upheld the AO's decision, rejecting additional evidence presented by the assessee under Rule 46A, stating that some documents were already filed before the AO and others were in the public domain.
- Assessee's Contention: The assessee maintained that the plots were shown as investments in the balance sheets of earlier years and that separate accounts were maintained for investments and trading assets. The assessee cited Circular No. 4/2007 from the CBDT and various court decisions supporting the treatment of assets as investments.
- Tribunal's Findings: The Tribunal found that the assessee consistently showed the plots as investments in audited balance sheets, and the lower authorities failed to appreciate this evidence. The Tribunal noted that the plots were held for more than three years and were not used for construction, which supported the assessee's claim of treating them as investments. The Tribunal also considered additional documents filed under Rule 46A, which were crucial for determining the nature of the assets and the intention behind their acquisition.
- Conclusion: The Tribunal set aside the orders of the lower authorities and restored the matter to the AO for a fresh examination, directing the AO to consider the additional evidence and give the assessee a fair opportunity before deciding the issue.

2. Addition Made on Account of Deemed Dividend under Section 2(22)(e):
- Facts and Arguments: The AO taxed advances received by the assessee from Sunny Housing (India) Pvt. Ltd. (SHIPL) as deemed dividend under Section 2(22)(e), based on the fact that one of the partners of the assessee firm was a shareholder in SHIPL. The AO argued that the payer company had sufficient reserves, and the conditions for deemed dividend were satisfied.
- Assessee's Contention: The assessee argued that it was not a shareholder of SHIPL and that the transactions were business transactions, not loans or advances. The assessee cited the Special Bench decision in Bhaumik Colour Pvt. Ltd. and the Bombay High Court decision in Universal Medicare P Ltd., which held that deemed dividend provisions apply only to shareholders.
- Tribunal's Findings: The Tribunal agreed with the assessee, noting that the assessee firm was neither a registered nor a beneficial shareholder of SHIPL. The Tribunal cited various judicial pronouncements supporting the view that deemed dividend provisions apply only to shareholders. The Tribunal also distinguished the Delhi High Court decision in National Travel Services, which the AO relied on, noting that the facts of that case were different.
- Conclusion: The Tribunal directed the AO to delete the addition made under Section 2(22)(e), as the assessee firm did not meet the criteria for deemed dividend.

Summary:
The Tribunal allowed the appeal in part, directing the AO to re-examine the treatment of long-term capital gains on the sale of land after considering additional evidence and to delete the addition made under Section 2(22)(e) for deemed dividend, as the assessee firm was not a shareholder of the payer company. The judgment emphasizes the importance of properly classifying assets and the specific criteria for applying deemed dividend provisions.