2016 (4) TMI 1049 - AT - Income Tax

Sale of flat and plots of land - assessed as capital gains OR business income - Held that - We hold that the revenue has been assessing the profits from the housing projects derived by the assessee as income from business and it cannot deviate its stand in the assessment year under appeal in respect of profits of the same project merely because there is no closing stock of plots and flat shown in the books of the assessee and merely because no sale of plots had been offered as business income in the immediately preceding previous year by the assessee. Hence we hold that the profit derived from sale of plots and flat should be assessed only as income from business and not as capital gains. Accordingly the adoption of value determined by stamp valuation authorities u/s 50C of the Act does not arise. Moreover, the amendment in section 43CA of the Act applying the value determined by stamp valuation authorities for stock in trade is applicable only from Asst Year 2014-15 and not earlier. Hence upto the Asst Year 2013-14, the decision rendered by the Hon ble Madras High Court in the case of CIT vs Thiruvengadam Investments P Ltd reported in (2009 (12) TMI 48 - MADRAS HIGH COURT ) would hold the fort during the assessment year under appeal. In the said case, the Hon ble Madras High Court held that the property in the hands of the assessee was treated as a business asset and not as capital asset, and hence there is no question of invoking the provisions of section 50 C of the Act. - Decided in favour of assessee Disallowance of expenditure for purchase of construction materials - Held that - We have already held in the previous ground that the assessee is engaged in the business of real estate developer and promoter during the assessment year under appeal. The assessee has also shown income from business on sale of plots and sale of flat during the assessment year under appeal. We find from the ledger account of purchase of construction materials amounting to ₹ 4,60,858/- , the same were incurred on various dates by the assessee. We deem it fit and appropriate, in the interest of justice and fair play, to set aside this to the file of the Learned AO to verify the bills and vouchers submitted by the assessee in support of its claim and direct the Learned AO to allow the same as deduction if the same are found to be genuine - Decided in favour of assessee for statistical purposes. Addition on account of labour charges - Held that - We have already held in the previous ground that the assessee is engaged in the business of real estate developer and promoter during the assessment year under appeal. The assessee has also shown income from business on sale of plots and sale of flat during the assessment year under appeal. We find from the ledger account of labour charges together with the muster roll, that the labourers had affixed their thumb impression on various dates while receiving the labour charges from the assessee. Hence we find that the observation of the Learned CIT(A) that all the vouchers were signed by one person with identical hand writing is unjustified. We deem it fit and appropriate, in the interest of justice and fair play, to set aside this to the file of the Learned AO to verify the genuinity of the labour charges paid by the assessee together with the evidences submitted thereon and direct the Learned AO to decide this issue based on the evidences filed by the assessee in this regard - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Classification of income from the sale of flat and plots of land as capital gains versus business income.
2. Disallowance of expenditure for purchase of construction materials.
3. Disallowance of expenditure on labor charges.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Flat and Plots of Land:
- Facts: The assessee, engaged in share trading and real estate business, declared the sale of flat and plots as business income. The AO reclassified this as capital gains without deducting the cost of acquisition, arguing that the real estate activity was not carried out by the assessee.
- Assessee's Argument: The assessee contended that the profits from the sale of flat and plots, part of the "Neel Kamal Apartment" project, should be treated as business income. The assessee followed the 'completed contract method' and had consistently declared such sales as business income in previous years.
- AO's Stand: The AO doubted the genuineness of the sales and estimated the fair market value, treating the gains as capital gains.
- CIT(A) Decision: The CIT(A) upheld the AO's decision but directed the AO to determine the fair market value of the flat and plots for accurate capital gains calculation.
- Tribunal's Decision: The Tribunal found that the assessee had been consistently treated as a real estate promoter and developer, and the sale proceeds should be considered business income. The Tribunal rejected the AO's estimation of fair market value and ruled that the provisions of section 50C of the Act, applicable to capital assets, do not apply to business assets. The Tribunal allowed the assessee's appeal on this ground.

2. Disallowance of Expenditure for Purchase of Construction Materials:
- Facts: The AO disallowed Rs. 4,60,858/- claimed by the assessee for construction materials, questioning the purpose of the expenditure.
- Assessee's Argument: The assessee provided details and bills for the expenditure, stating it was for boundary wall and pavement construction related to the sold plots.
- CIT(A) Decision: The CIT(A) upheld the disallowance, doubting the reliability of the evidence provided.
- Tribunal's Decision: The Tribunal directed the AO to verify the bills and vouchers and allow the expenditure if found genuine. The appeal was allowed for statistical purposes.

3. Disallowance of Expenditure on Labor Charges:
- Facts: The AO disallowed Rs. 1,49,140/- claimed for labor charges, questioning the genuineness of the expenditure.
- Assessee's Argument: The assessee provided muster rolls with thumb impressions of laborers as evidence of genuine expenditure.
- CIT(A) Decision: The CIT(A) upheld the disallowance, observing that the muster rolls seemed to be signed by one person.
- Tribunal's Decision: The Tribunal found the CIT(A)'s observation unjustified and directed the AO to verify the genuineness of the labor charges. The appeal was allowed for statistical purposes.

Conclusion:
The Tribunal ruled in favor of the assessee on the classification of income from the sale of flat and plots as business income and directed the AO to verify the genuineness of the disallowed expenditures for construction materials and labor charges. The appeal was partly allowed for statistical purposes.