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TMI Blog2005 (5) TMI 542X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in terms of agreement dated 12-11-1981. The assessee-firm agreed to purchase a piece of land together with structures standing thereon admeasuring 15,000 sq.mts. lying and situated at Andheri Kurla Road, Mumbai, from the owner Miss G.D. Coomana for an aggregate consideration of Rs. 11 lakhs. The original owner executed the Deed of Confirmation on 28-6-1982 confirming the agreement for sale and it was registered with the Sub-Registrar of Assurances. The said property was reserved initially for recreation garden and a portion of the said property was encroached upon authorisedly. The property was also affected by the provisions of Urban Land (Ceiling and Regulation) Act, 1976. The physical possession of the said property since the date of its acquisition was with one M/s. Krishnakumar Co. 3.1 The assessee-firm underwent various changes in its constitution from time to time. New partners were admitted, profit-sharing ratios were revised and some of the old partners retired. However, the terms and conditions of the partnership, as evidenced in subsequent deed dated 1-4-1993 and 30-12-1993, continued to be more or less similar to those contained in the original deed of partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of trade and charging the gains arising therefrom under the head Profits and gains of business or profession . The Assessing Officer also disallowed the claim of compensation payments of Rs. 50 lakhs to M/s. Lotus Trading Co. and payment of Rs. 40 lakhs to M/s. G.K. Enterprises. In his assessment order the Assessing Officer placed reliance on original partnership deed dated 29-12-1981 as also on various deeds of Reconstitution of Partnership dated 1-4-1993 and 13-12-1993. Supplementary Partnership Deed dated 23-3-1994, purchase deed of Property dated 12-11-1981 and Release Deed dated 28-3-1994. 3.5 Aggrieved by Assessing Officer s assessment order, the assessee preferred appeal before CIT(A), who granted partial relief to the assessee by holding that the assessee acquired the land in question as an asset in the year 1981 constituting investment of the partnership firm and it was only in March, 1996, when the appellant made an application for commencement certificate and development permission, that the asset in question got converted into stock-in-trade. Therefore, the year ending 31-3-1996 is to be taken as the year in which the conversion of the asset into stock- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case and in law, the learned CIT(A) erred in charging interest under sections 234A and 234B. 5.The appellant craves leave to add, amend and/or alter any of the grounds of appeal if need be. 6.The appellant prays that on the grounds stated above, they may be granted relief by allowing the claim of capital gains made by the appellants after allowing the deductions for development expenses amounting to Rs. 3,90,931 incurred during assessment years 1983-84 to 1993-94 and the compensation payments amounting to Rs. 90 lakhs." 5. In IT Appeal No. 03/Mum/2002, the revenue has raised the following grounds of appeal before the Tribunal : "1( i )On the facts and circumstances of the case and in law, the learned CIT(A) erred in directing to treat the plot of land situated at Andheri Kurla Road, Mumbai, as investment up to 25-3-1996, the date on which the assessee-firm made an application to the Municipal Corporation of Greater Bombay for development, permission and grant of commencement certificate and, therefore, part of sale consideration was capital gain and part of the same as trading receipt. ( ii )While doing so, the ld. CIT(A) completely fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth these grounds are interconnected. The issue involved therein is as to whether gain on sale of land is assessable as capital gains or as business income? The Assessing Officer treated the solitary transaction of purchase and sale of land as adventure in the nature of trade; the Assessing Officer, therefore, treated the gain on sale of land by assessee to be taxable as business income and assessed the same accordingly. The ld. CIT(A) held that the land was investment up to 25-3-1996 and on that date it was converted into stock-in-trade of business carried on by assessee and he, therefore, directed the Assessing Officer to compute/tax capital gains up to the aforesaid date and thereafter up to the date of sale as business income. 7. The ld. AR of assessee has contended that letting out of the property is the main activity/object of assessee, though selling and letting out both are mentioned in various partnership deeds. In this regard, he has referred to paras 4 and 5 of partnership deed dated 29-12-1981 (page 310 PB), para 3 of partnership deed dated 1-4-1993 (page 296 PB), para 3 of partnership deed dated 30-12-1993 (page 274 PB), para 1 of supplementary partnership deed dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (as contended by the assessee and as reflected in the books of account of the assessee) and not whether assessee carried on business activity or not. 9. He has contended that the aforesaid land was shown as investment in the books of assessee since past 16 years, and no construction/develop-ment activity was carried out on the aforesaid land. He has contended that the aforesaid land was sold after a period of 16 years and the assessee has not indulged in any other activity of purchase/sale of land, i.e. , the aforesaid transaction is a solitary transaction. He has contended that the assessee had purchased the land for the purpose of construction of building and letting out the same as mentioned in various partnership deeds; and the partnership deed dated 24-3-1994 clarifies that the activity of the appellant-firm was only with respect to letting out of property. He has contended that the partners are even otherwise having rental income; that the aforesaid land cannot be treated as stock-in-trade and in turn, the gain on sale of land to be business income merely because the assessee is a builder or is engaged in the business of properties or because its object, as specified i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, submitted that as the transaction of land, in the case of the present assessee, was a solitary transaction and as the land was held for a period of 16 years and as the said land was reflected as investment in the balance sheet, the said land constituted a capital asset, the sale of which resulted in capital gains and not business income. 12. The ld. AR of assessee has contended that as the assessee wanted to construct building on land for the purpose of letting it out, the land would definitely be only a capital asset and not stock-in-trade. He has, however, also contended that even if the intention of the assessee was to construct and sell building, yet in view of the above-mentioned submissions it cannot be held that the land was stock-in-trade. Referring to the Assessing Officer s finding on page 28 of his order that "Had the partners or the assessee-firm itself been engaged in an activity/business different from the sale/purchase of land(s), then the said activities of the assessee-firm might have been termed as a capital investment", he has contended that the partners of the assessee-firm are having rental income also which fact is undisputed as evident from page 14 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Bench, the assessee had incurred cost of improvement for construction of road, garden, drainage, etc., whereas, in the case of the present assessee, no construction/development has been done. He has accordingly contended that instead of following the Indore Bench decision for applying section 45(2) and for holding that land was converted to stock-in-trade on date of application for IOD, the judgment of the jurisdictional High Court in the case of Fort Properties (P.) Ltd. v. CIT [1994] 208 ITR 232 (Bom.) should be followed wherein though the land was reflected as stock-in-trade, it was held to be a capital asset resulting in capital gains as it was a solitary transaction. He has contended that similar view has been taken in D.L.F. Housing Construction (P.) Ltd. v. CIT [1983] 141 ITR 806 (Delhi) wherein though the land was shown as stock-in-trade, it was held to be capital asset resulting in capital gains as it was a solitary transaction. He has also relied on D.L.F. Housing Construction (P.) Ltd. v. CIT [1983] 141 ITR 8062 (Delhi) and D.L.F. United Ltd. v. CIT [1986] 158 ITR 342 (Delhi) wherein though the land was purchased for the purpose of development, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order, he has contended that the Assessing Officer has given finding that there was a regular scheme on the part of assessee to earn profits. Referring to pages 19 and 20 of assessment order he has contended that the Assessing Officer has duly discussed the decisions cited by ld. AR of assessee before the Assessing Officer and has drawn his finding that despite various changes in the constitution of partnerships, the different partners still are those persons who have been engaged in the business of real estate and that various partnership deeds indicate that the business of assessee-firm has been the purchase/sale/development, etc., of land/immovable property. 19. Referring to page 21 of assessment order, the ld. DR has drawn our attention to the following para contained in the assessment order : "When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit and the activity can only be described as a business venture." He has referred to page 23 of assessment order and contending that the Assessing Officer has relied on P.M. Mohammad Mira Khan v. CIT [1969] 73 ITR 735 (SC) and Khan Bahadur Ah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the surplus arising from the same is hereby being taxed under the head Profits and gains of business or profession ." 21. The ld. DR has contended that the ld. CIT(A) has come to the middle path in his conclusion as he has drawn in para 6.3 on page 12 of his impugned order but the ld. CIT(A) s reasoning does not bear with facts. He has contended that the assessee s intention had all along been to develop, construct and sell the property since very beginning and it is not that it is only on obtaining of IOD that the assessee changed/formed its intention to develop the property. He has contended that merely obtaining of IOD does not show the change of intention on that day and that prior thereto purchase of land by assessee does not become investment in capital asset. He has contended that the Assessing Officer has considered the various partnership deeds and has come to the finding that the assessee s intention was always of doing the business of buying and selling real estate. He has contended that the mere fact of there being this solitary transaction does not make it investment. He has contended that it has been an organised and systematic activity of assessee to purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s activities enumerated on page 29 of assessment order, which constitute development. Assessing Officer has relied on Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 (SC). Also the appellant has incurred various expenses such as salary expenses, interest expenses, bonus expenses, etc. The assessee has claimed expenditure of Rs. 11.54 crores for development during financial years 1993-94, 1995-96, 1996-97 and 1997-98. The aforesaid activities show that the assessee was carrying on business. 28. We find from the perusal of record that for drawing his conclusion that gain on sale of land is allowable partly as capital gains and partly as business income, the ld. CIT(A) rendered his discussion/finding in paras 5.1 and 5.2 of his order, in short, are as under : "Insofar as the object clause of the partnership deed is concerned, no conclusion can properly be based solely on the objects or powers mentioned therein. They are relevant matters, which should be taken into account and kept in view in determining the character of the transaction carried on. The objects and powers are there to carry on a trade or business but their existence does not ipso facto mean that they have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the year 1994 and subsequently a part of the land which was originally agricultural was converted into non-agricultural land. These facts have not been disputed by the Assessing Officer. The appellant obtained permission from the ULC authorities, got the plan for development of plot, approved from BMC, levelled the land, did removal of debris, removal of tenants and got the compound wall erected. The payment for purchase of occupancy right is attributed only for obtaining better title and cannot be said to be an activity for development. The conversion of the land to non-agricultural was made in July 1997 as is evident from the letter issued to the appellant from the office of the Collector, Mumbai Suburban Dist. on 15-7-1997. Application under ULC are required to be made irrespective of whether one would like to develop the land or sell the land as an investment. The appellant was required to furnish the copy of the application so made, furnish copy of commencement certificate, etc., and it is noticed that the plans were approved by Greater Bombay Municipal Corporation vide their letter CE/6080/WS/AK dated 2-11-1996. It is further noticed that the appellant had made applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an estate for Rs. 6 lakhs, paid Rs. 11,000 and the balance of Rs. 5.89 lakhs was to be paid before 25-9-1955. One of the terms of agreement was that the sale deed was to be executed in favour of either the appellant or his nominees. It was found that the appellant did not have the resources either to buy or to cultivate the estate himself. The assessee divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers for a sum of Rs. 5,18,500 and the 23rd plot was retained by the appellant himself. In the circumstances, it was held that the transactions of appellant constituted an adventure in the nature of trade and were in the course of a profit-making scheme. However, this case is distinguishable from the instant case on facts and particularly in view of the fact that in the cited case the assessee did not have resources to buy or cultivate the land himself and so divided the land into a number of plots and retained only one plot with himself and sold the rest all; there was also one of the terms of agreement that the assessee s vendor will execute the sale deed in favour of assessee s nominees. All these facts emphatically showed that by enterin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership deed dated 24-3-1994 clarified that the activity of assessee-firm was only with respect of letting out of property. The fact that the assessee s business activity also included effecting repairs and renewal to buildings and render allied service speaks a lot to corroborate and establish the assessee s intention underlining its activities being of letting out the property. Such activities do not contradict/controvert the assessee s intention of investment and holding the property as capital asset as the same do well spell out the safeguarding, securing and preserving of the property and not necessarily a business activity till 25th March, 1996 when the assessee made a move and took a material/substantive step of applying to BMC for commencement certificate and development permission reflecting the dominant intention to earn profits. In our opinion, considering all these facts, the nature of activity and the period involved along with all other facts and circumstances of the case, the discussions made by the authorities below together with the contentions raised by the rival representatives, as also the legal position emerging from various cited decisions, we find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Lotess Trading Co. was alleged to be sub-tenant of the tenant Shri John Paul Cornello whereas Shri Cornello denied this fact of sub-tenant of the recipient M/s. Lotess Trading Co. in his statement recorded under section 131 of the Act and even pleaded ignorance about the so-called sub-tenant. He has also found that the payment of Rs. 50 lakhs was not deposited in the bank account of M/s. Lotess Trading Co. but in the bank account of somebody else. We also find that the assessee did not avail of the opportunity to cross-examine John Paul Cornello. Similarly the ld. CIT(A) also found that the cheque for payment of Rs. 40 lakhs allegedly made to M/s. G.K. Enterprises, proprietary concern of Shri T.S. Nikam, as compensation for their tenancy was not deposited in the account of Shri T.S. Nikam but in the name of somebody else and soon after deposit the cash was withdrawn. Despite several letters the assessee did not furnish the address of M/s. G.K. Enterprises nor did the assessee furnished reply to the show-cause notice regarding anomaly of deposit of payment. The ld. CIT(A) observed that this compensation payment was claimed to reduce the tax liability. As such, considering all the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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