2017 (1) TMI 47 - AT - Income Tax

Profit arising on sale of property - capital gain or business income - Computation of capital gain - Held that - The assessee was not idle after purchasing the land. Before expiry of two months period from the date of purchase, he has entered into a Joint Venture Agreement for development of the property, which fact, in our view, shows that the intention of the assessee was not to keep the property as a Capital asset, but to exploit the same as a commercial asset with a view to make the profit. The subsequent legal complications have paralysed the project of the assessee and hence the project could not be executed. These facts have not been disputed and hence we are of the view that the Ld CIT(A) was not justified in holding that the impugned asset is a capital asset for the reason that it was not actually exploited commercially. In our view, actual exploitation should not the lone deciding factor. The assessee has intended to commercially exploit the property by developing it and he has been pursuing the same thereafter for many years. Hence, the intention of the assessee, from the very beginning, was to exploit the property as a commercial asset and not to hold it as a Capital asset. Accordingly we are of there is merit in the claim of the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the profit arising on sale of impugned property as business income of the assessee. As held that that the impugned property was not a capital asset. Hence the question of application of provisions of sec. 50C does not arise. Disallowance of claim for deduction paid upon cancellation of Joint Venture Agreement - Held that - A perusal of the order passed by Ld CIT(A) would show that the tax authorities are not disputing the existence of Joint Venture agreement and the cancellation thereof. In fact, the assessee has furnished copy of both the agreements in the paper book and they have also been filed before the tax authorities. We have earlier held that the assessee has carried out the activity of purchase of property as a commercial venture and he has also paid the compensation on cancellation of the Joint Venture Agreement. Hence, in our view, the compensation was paid by the assessee in the course of carrying on his commercial activities and the same would go to increase the value of stock in trade, being the property here. Accordingly we direct the AO to treat the same as incremental cost to stock in trade and compute the profit accordingly Disallowance of depreciation on windmill - assessee had capitalised expenditure on Tower, Civil foundation, Erection & Commissioning, Consultancy fee, Freight charges, Finance charges, Warranty expenses etc as part of Wind Mill cost and claimed depreciation @ 80% - Held that - We notice that the consultancy fee, freight charges, warranty expenses, finance charges are connected with the purchase of wind mill before it is ready to commence its operations. The civil foundation, erection & Commissioning, 40 Mtr Tower are part of wind mill, without which the wind mill would not function. Hence we are of the view that there is merit in the claim of the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow depreciation at the higher rate of 80% on the rest of the items by considering the same as part of cost of wind mill.

Issues Involved:
1. Computation of capital gain vs. business income on the sale of land.
2. Application of provisions of Section 50C of the Income Tax Act.
3. Disallowance of compensation paid upon cancellation of a joint venture agreement.
4. Rate of depreciation on windmill accessories.

Issue-wise Detailed Analysis:

1. Computation of Capital Gain vs. Business Income on the Sale of Land:
The primary issue is whether the profit from the sale of land should be assessed as capital gain or business income. The assessee claimed that the profit should be treated as business income, asserting that he was a trader in properties. The AO, however, treated the profit as capital gain, noting that the property was held for some time before being sold, indicating an intention to hold it as a capital asset. The Tribunal analyzed the facts, including the joint venture agreement for redevelopment entered shortly after the purchase, and concluded that the intention was to commercially exploit the property, thus treating the profit as business income. The Tribunal relied on precedents, including the decisions in Smt. Bhanumati A Sanghavi Vs. CIT and Harbans Singh Vs. CIT, to support its conclusion.

2. Application of Provisions of Section 50C of the Income Tax Act:
The AO applied Section 50C, enhancing the sale consideration based on the stamp duty value. Since the Tribunal concluded that the property was held as a trading asset and not a capital asset, the provisions of Section 50C, which apply to capital assets, were deemed inapplicable. Therefore, the Tribunal set aside the orders of the tax authorities on this issue.

3. Disallowance of Compensation Paid Upon Cancellation of Joint Venture Agreement:
The assessee claimed a deduction for the compensation paid to Mr. Gidwani upon the cancellation of the joint venture agreement. The AO disallowed this claim, treating the property as a capital asset. The Tribunal, however, recognized the payment as part of the commercial venture and directed that the compensation be treated as an incremental cost to the stock in trade, thus allowing the deduction.

4. Rate of Depreciation on Windmill Accessories:
The assessee claimed a higher depreciation rate of 80% on various expenses incurred for installing the windmill. The AO allowed 80% depreciation only on the windmill assembly and blades, applying a normal rate of 15% on other items. The Tribunal referred to decisions such as CIT Vs. Cooper Foundary Pvt Ltd and CIT Vs. K K Enterprises, which supported the inclusion of costs related to civil work, foundation, and other installation-related expenses as part of the windmill cost eligible for higher depreciation. Consequently, the Tribunal directed the AO to allow depreciation at 80% on all related items.

Conclusion:
The appeal filed by the assessee was allowed. The Tribunal directed that the profit from the sale of the property be assessed as business income, negated the application of Section 50C, allowed the deduction of compensation paid, and granted a higher depreciation rate on windmill accessories.

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