2020 (5) TMI 185 - AT - Income Tax

Profit arising on sale of Kadri Kamble land - Capital asset or Business asset - assessee had purchased the land for the purpose of constructing flats on it - HELD THAT - Amount paid to tenants has been capitalized and not claimed as deduction - In case of execution of project of construction of multistoried apartment, it is the trade practice to bear the rent paid by tenants who are going to be allotted flats in the proposed building and further, those expenses are usually claimed against the revenue generated from the said project only. Hence the question of claiming the rent so paid as deduction against other income of the assessee does not arise, since they are project specific expenses.Various reasons given by CIT(A) to treat the land as capital asset would fail. Uncontroverted fact is that the intention of the assessee, at the time of purchase of the land, was to hold the same as business asset only, which is evident from the purpose for which the land was purchased. There is no material to show that the assessee has really converted the business asset into capital asset. Character of the impugned land is to be considered as business asset only and consequently, the profit arising on its sale is required to be assessed as business income only. Accordingly, we set aside the order passed by CIT(A) on this point. Indexation benefit - CIT(A) has given reduction of ₹ 45.00 lakhs from the sale consideration, since the buyer of the land Smt Latha, has confirmed that she has not honoured the cheques given for ₹ 45.00 lakhs - HELD THAT - CIT(A) was justified in giving reduction of ₹ 45.00 lakhs. Since there is no dispute that the assessee has taken cash of ₹ 11.00 lakhs, CIT(A) has added the same. Accordingly, we are of the view that the CIT(A) was justified in adopting the sale consideration as ₹ 3.21 crores. The parties are not also disputing the decision of CIT(A) in allowing deduction of cost of purchase of land. We notice that the first appellate authority has allowed indexed cost of acquisition, since he has held that the profit is assessable under the head Capital Gains. The indexation benefit will not be available to the assessee, since we have held that the land is a business asset and consequently, the profit is assessable under the head Income from Business. The order of Ld CIT(A) is modified accordingly. Deduction allowable u/s 54F - HELD THAT - Since we have held that the profit arising on sale of land is assessable as Business income of the assessee, the question of allowing deduction u/s 54F of the Act does not arise. Accordingly, the order passed by Ld CIT(A) on this issue is reversed. Unaccounted investment in purchase of flat in West wind project - HELD THAT - There is no dispute with regard to the fact that the group concerns of the assessee has surrendered a sum of ₹ 4.00 crores and accordingly their Balance Sheets have been revised, apparently, for incorporating the amount so surrendered. The investment in West wind flats is disclosed by the assessee in his proprietary concern named M/s Classic Promoters Developers. In the revised Balance Sheet of the above said concern, the investment made in the above said project was shown at ₹ 61,83,225/-. Hence the different works out to ₹ 7,02,775/- only. After referring to seized material and noticing certain discrepancies, CIT(A) has confirmed addition to the extent of ₹ 7,16,275/-. We notice that the first appellate authority has considered the available materials and has reached a reasonable conclusion on this issue. Accordingly we do not find any reason to interfere with his decision taken on this issue. Accordingly, we confirm the order passed by CIT(A) on this issue. Appeal of the assessee is dismissed

Summary

Issues Involved:
1. Determination of Sale Consideration for Kadri Kamble Property.
2. Assessment of Profit from Kadri Kamble Property as Capital Gains vs. Business Income.
3. Eligibility for Deduction under Section 54F of the Income Tax Act.
4. Addition of Unaccounted Investment in Flats Purchased in West Wind Project.

Detailed Analysis:

1. Determination of Sale Consideration for Kadri Kamble Property:
The assessee sold the Kadri Kamble property to Smt. A Latha for a consideration of ?1,07,00,000 as per the sale deed. However, during a search, a sale agreement was found indicating a sale consideration of ?3,55,00,000. The assessee claimed that due to legal issues and tenant problems, the actual sale consideration was reduced to ?1,07,00,000, and further claimed that ?45,00,000 of this amount was not received. The Ld CIT(A) reduced the sale consideration to ?3,21,00,000 considering the non-receipt of ?45,00,000 and the addition of ?11,00,000 received in cash. This was upheld by the tribunal, which found no credible explanation for the drastic reduction in sale consideration from ?3.55 crores to ?1.07 crores.

2. Assessment of Profit from Kadri Kamble Property as Capital Gains vs. Business Income:
The AO assessed the profit from the sale of Kadri Kamble property as business income, considering the assessee's business of property development and the intention to construct flats on the land. The Ld CIT(A) treated the land as a capital asset, citing reasons like the capitalization of tenant compensation and the assessee's statement under section 132(4). However, the tribunal held that the land was a business asset, given the assessee's initial intention and lack of evidence for conversion to a capital asset. Consequently, the profit was to be assessed as business income.

3. Eligibility for Deduction under Section 54F of the Income Tax Act:
The AO denied the deduction under section 54F, as the profit was assessed as business income and the new residential property was in the joint name of the assessee and his spouse. The Ld CIT(A) allowed the deduction, treating the profit as capital gains. The tribunal reversed this decision, affirming that since the profit was business income, the deduction under section 54F was not applicable.

4. Addition of Unaccounted Investment in Flats Purchased in West Wind Project:
The AO added ?28,57,506 as unexplained investment, noting that the assessee accounted for only ?40,28,494 out of ?68,86,000 paid for the flats. The Ld CIT(A) reduced this addition to ?7,16,275 based on the revised balance sheet showing an investment of ?61,83,225 and certain discrepancies in the seized material. The tribunal upheld the Ld CIT(A)'s decision, finding it reasonable and based on available materials.

Conclusion:
The tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal, affirming the treatment of the Kadri Kamble property profit as business income and denying the deduction under section 54F. The tribunal also upheld the revised sale consideration and the reduced addition for unaccounted investment in the West Wind flats.