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TMI Blog2017 (11) TMI 1867X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 45(2) of the Act. Once the stand of assessee of assessing the gains as long term capital gains under section 45(2) of the Act is accepted, then the consequent thereto, is that no addition can be made on account of increase in work-inprogress. However, the business income as declared by the assessee on sale of developed portion of project is to be assessed in the hands of assessee. The assessee has developed commercial project i.e. KPCT and the business profits are directed to be assessed in the respective years as declared by the assessee. In view thereof, we hold that income declared by the assessee as capital gains under section 45(2) of the Act is to be assessed as such and not as business income which has been assessed by the authorities below. Secondly, there is no merit in grounds of appeal raised by the Revenue against the order of CIT(A) in deleting the addition on account of mismatching of work-in-progress. Reversing the order of CIT(A) with regard to taxing the part of sale proceeds of KPCT project in the year as business income of the year, we direct the Assessing Officer to assess the same as long term capital gains under section 45(2) of the Act proportionately a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2005-06, since originally the relief was granted in assessment years 2003-04 and 2004-05 and for the first time, the disallowance was made by the Assessing Officer in assessment year 2005-06. However, both in assessment years 2003-04 and 2004-05, consequent to the order passed by the Assessing Officer, 263 proceedings were taken up and the assessment was completed under section 143(3) r.w.s. 263 of the Act, which in turn, has been decided by the CIT(A), against which the assessee and the Revenue are in appeal. 4. First, we shall take the facts and issues in ITA No.344/PUN/2010 i.e. appeal filed by the assessee and in ITA No.528/PUN/2010 filed by the Revenue. 5. The assessee in ITA No.344/PUN/2010, relating to assessment year 2005-06 has raised the following grounds of appeal:- 1. The learned CIT(A) II Pune erred in law and facts in dismissing the appeal of the appellant and in holding that the appellant is not eligible to claim deduction of ₹ 1,70,96,381/- u/s 80IB(10) of the ITA, 1961. He ought to have considered the facts on proper merits. 2. The learned CIT(A) II, Pune erred in law in not appreciating that the opportunity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t named Parmar Garden. The said project was completed in March, 2003. The Assessing Officer noted that the claim of deduction under section 80IB(10) of the Act was disallowed in assessment years 2003-04 and 2004-05 in respect of profits of Parmar Garden and hence, the same was also disallowed in the hands of assessee in the instant assessment year also. 9. The CIT(A) also following the earlier orders of CIT(A) in assessment years 2003-04 and 2004-05 disallowed the claim of deduction under section 80IB(10) of the Act. 10. The assessee is in appeal against the order of CIT(A). 11. The learned Authorized Representative for the assessee pointed out that similar issue has been decided by the Tribunal in ITA Nos.234/PUN/2009 and 569/PUN/2009, relating to assessment years 2003-04 and 2004-05 and vide order dated 22.03.2017, the assessee was held to be entitled to proportionate deduction under section 80IB(10) of the Act in respect of units which fulfils the conditions laid down of having built up area of 1500 sq.ft. 12. The learned Departmental Representative for the Revenue fairly admitted that similar issue was raised in assessment years 2003-04 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 755 sq.ft. was to be left for hospital project, to be given to PMC, free of cost. Hence, the deemed saleable area was 2,07,505 sq.ft. The assessee thus, computed long term capital gains in assessment year 2005-06 i.e. in the year when part of constructed area was sold. The total deemed consideration under section 45(2) of the Act for 2,07,505 sq.ft. was adopted at ₹ 6.29 crores, out of which indexed cost of acquisition of ₹ 9,13,980/- was deducted and the long term capital gains of ₹ 6,19,86,020/- was worked out. Since the assessee had executed sale agreement for area aggregating to 62,805 sq.ft. upto 31.03.2005 i.e. including 39,805 sq.ft. upto 31.03.2004, the proportionate long term capital gains on ₹ 6.19 crores was worked out at ₹ 1,87,61,148/-. The assessee had already offered long term capital gains upto assessment year 2004-05 at ₹ 1.24 crores and the balance long term capital gains for the year under consideration was offered at ₹ 63,46,268/-. 16. The Assessing Officer during the course of assessment proceedings observed that the basic and core issue was with regard to the disclosure of capital gains by the assessee, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. He also made reference to the CBDT Circular No.4/2007, dated 15.06.2007 with regard to recognizing shares as capital asset and also stockin-trade, to contend that primarily it depended on the intention of the assessee whether an asset is capital asset or stock-in-trade or business asset. The Assessing Officer was of the view that from the facts stated by the learned Authorized Representative for the assessee related to the acquisition of land, intention of assessee, character of land and nature of asset was factually incorrect and self contradictory. The Assessing Officer observed that the assessee claimed that the land was reserved by the PMC on the date of acquiring development rights and that construction could not be made on the land and at the same time, the assessee claims that it intended to construct posh corporate office for its own use. Further, the claim of assessee that it purchased land in 1993 was also factually incorrect, wherein the assessee purchased development rights in the land through assignment deed dated 03.06.1993, such development rights of land were purchased by KC Parmat, as proprietor of M/s. Parmar Construction in 1984 from the landlords, as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he constructed building after development of land or ₹ 1 lakh, which was included in the agreed consideration of ₹ 4,23,500/-. As per clause (3), purchaser was entitled to develop and construct building thereon for using residential and commercial units after obtaining necessary permissions and clearances from the competent authorities. Similarly, other clauses also referred to the development and its sale thereafter. The Assessing Officer vide para 15.13 thus, observed that the development rights in the land were enshrined in the agreement dated 18.03.1984, which was assigned by Shri K.C. Parmar to the assessee company by Deed of Assignment dated 03.06.1993 for consideration of ₹ 5,23,500/-. The said land was under reservation for Dispensary and Maternity Home, as per development plan notified by the Government of Maharashtra in Gazette dated 05.01.1987, which allowed the development of land with certain conditions mentioned therein. The revised plan notified vide Gazette No.39, dated 30.09.1993 reiterates the conditions. The Assessing Officer thus, observed that the owners permitted to develop the amenities subject to his handing over the corporation free of cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt asset, from capital / fixed asset. The Assessing Officer observed that the assessee did not wait for eight years as claimed by it, before starting business venture at KPCT project, by developing the land, though the actual construction of the building may have started during the financial year 2001-02 was held to be an afterthought. The Assessing Officer thus, held as under:- In nutshell, a property which does not yield to its owner an income or personal enjoyment, by virtue of its ownership is more likely to be have been acquired with the object of a deal, and hence the nature of property is relevant. The motive of acquiring a property can be inferred from subsequent conduct and surrounding circ in the absence of direct evidence of the assessee s intentions, and if necessary, in the face of his own evidence. Where there is no pride of possession, such property is acquired for earning profit by sale, and is a trading transaction. Where the property is used in a business venture, period of holding is not relevant. 18. It was further observed by the Assessing Officer that It is also a trite law that the way entries are made by an assessee in his books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits from KPCT project at ₹ 2,23,76,500/- was made in the hands of assessee. Another related issue which was considered by the Assessing Officer was difference in work in progress and the profit element shown as income and expenditure account. The Assessing Officer tabulated the details for three assessment years and as the assessee could not reconcile the difference in increased WIP value, the Assessing Officer observed that the actual increase in WIP was not being correctly shown in the accounts and actual profits as per the assessee s own method of accounting were not being reflected. The difference between the amounts was added to the total income as undisclosed profits at ₹ 2,37,75,142/- in the year under consideration and balance in assessment years 2003-04 and 2004-05. 19. Before the CIT(A), the assessee pointed out that all the observations of the Assessing Officer were wrong and incorrect and he demonstrated the same by way of tabulated details and pointed out that the rights became commercially viable nature only in ay 2002-03 after permission by the PMC through agreement with Commissioner on 28.12.2001. He thus, pointed out that there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into Assignment Deed with Shri K.C. Parmar to acquire the development rights. Hence, it was decision of the assessee to acquire the development rights of particular piece of land since it was incorporated to conduct the business of developer, builder, etc. Referring to para 15.17 of the assessment order, the CIT(A) further observed that the assessee made an application dated 15.12.1999 to the PMC for sanction of layout plan and commencement certificate to develop the proposed layout was also issued by the PMC on 10.02.2000. The assessee paid development charges of ₹ 3,13,200/- on 04.02.2000 to the PMC. He further referred to the assessee entering into agreement to sell the shops in KPCT project during the months of November and December, 2000 and the building commencement certificate obtained by the assessee on 25.10.2001. The CIT(A) observed that the assessee had not been able to contradict the same in his submissions and the explanation given in this regard was not tenable in law. Further, the CIT(A) also noted and upheld the contention of Assessing Officer that the motive of acquiring the property could be inferred from the subsequent conduct which had not been dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to the increase in WIP as shown in schedule-N by the assessee. The CIT(A) noted that the assessee had adopted percentage completion method in respect of his KPCT commercial project and had offered profits on the work done during different years. For this, the opening WIP had been added to the construction cost incurred during the year and the profits were estimated and then the figures of closing WIP was arrived at. This was the basis of assessee s working given in schedule-N of the Balance Sheet. The difference between the closing WIP and the sum of opening WIP and the cost incurred during the year was the profit for the year which had already been offered by the assessee in every year. The CIT(A) thus, observed that the Assessing Officer had not considered the method of accounting of assessee but had worked out the difference between closing WIP of particular year and cumulative construction expenses incurred for all the years. He further observed that by making this calculation every year s difference would be the sum of the profits shown in the earlier years which would also increase cumulatively. Therefore, the issue was that the earlier years profit, which had alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee thereafter, converted the capital asset into business asset. He referred to the provisions of section 45(2) of the Act and pointed out that the capital gains on such conversion into stock in trade would arise when the constructed portion is sold. However, both the authorities below treated the same as business asset right from the beginning on the ground that the assessee was developer and whatever was acquired by developer was business asset. The learned Authorized Representative for the assessee pointed out that first question which arises is whether each businessman whatever he acquires is business asset or not. In this regard, he placed reliance on CBDT Circular dated 15.06.2000 in the case of Stock Brokers, wherein the holding of shares as stock in trade and investment by businessman has been recognized. The next observation of the Assessing Officer was that entries in the books of account were not decisive. In this regard, he placed reliance on the decision of the Hon ble High Court of Bombay in CIT Vs. Gopal Purohit (2011) 336 ITR 287 (Bom) and the Hon'ble Supreme Court in CIT Vs. Gopal Purohit reported in 336 ITR 287 (SC), wherein it was held that if an asset was sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 24. The learned Authorized Representative for the assessee further pointed out that in all the years under appeal starting from assessment years 2006-07 to 2008-09 and also in assessment years 2003-04 and 2004-05, which is the order passed under section 143(3) r.w.s. 263 of the Act, similar grounds of appeal have been raised as in assessment year 2005-06. 25. The Revenue is also in appeal against the directions of CIT(A) in recomputing the business income in the hands of assessee by way of ground of appeal No.2. The learned Departmental Representative for the Revenue on this issue relied on the orders of Assessing Officer and the CIT(A) and pointed out that the same has been deliberated upon extensively by the authorities below. 26. We have heard the rival contentions and perused the record. The issue vide ground of appeal No.4 raised by the assessee and the ground of appeal No.2 raised by the Revenue is in respect of addition of ₹ 2,23,76,500/- made on account of alleged profit of KPCT project by the Assessing Officer. The assessee had acquired the development rights of land at Sr.No.16/1/1, at Wawadi, Pune on 03.06.1993 for ₹ 5,23,500/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issible FSI of the plot of permissible user of the plot without taking into account the area utilized for constructing the amenity for Maternity Home and Hospital. The copy of DC Rules is placed at pages 32 to 35 of the Paper Book-1. Under the earlier DC Rules i.e. position in 1987, the areas which were marked for Maternity Home and Dispensary reservation continued and development was allowed as per Note 7 i.e. the areas that provide with sites of Maternity Homes and Hospitals shall be allowed for development for the designated purposes by the owners or through Public Institutions. The said old DC Rules are placed at pages 11 to 14 of the Paper Book-1. 27. The case of the assessee before us is that since 05.01.1987 i.e. the operation of old DC Rules, the assessee was not permitted to develop the land which was reserved for the purpose of Maternity Home and the DP road. On the other hand, the case of Revenue here is that under the DC Rules, 1987 i.e. notification dated 05.01.1987, the assessee was ready to develop the said piece of land and hence, it was business asset acquired by the assessee in 1993. On the other hand, the assessee claims that only after revised DC Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, Seller no1 should be granted to construct sale the commercial tenements on the said land and purchaser will relinquish the development right in the said land. The building plans for above mentioned construction have been submitted accordingly, the Seller Buyer agree following terms conditions. 28. The perusal of said clause (c) reflects that the PMC had taken a policy decision with respect to properties covered under hospitals zone and DMH zone (for the purpose of Maternity) on different dates and it also talks about sanction given by the PMC vide letter dated 02.09.2001. As per agreement, the additional FSI was sanctioned while sanctioning building plan on the said land. It was also agreed that against the grant of permission to construct and sell the commercial tenements on the said land, the purchaser i.e. PMC would relinquish the development rights in the said land and the seller was to construct and handover the possession of prescribed area without any consideration within stipulated period. Both the parties thereunder agreed to the terms and conditions in spirit of the basic undertaking. The agreement with PMC is dated 28.12.2001, under which 25% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an embargo on construction / development of piece of land which was reserved for Maternity Home and DP road. In view of the said embargo, the assessee was not in a position to develop the said land. Only after new DC Rules were issued, the assessee sought permission from the PMC to develop the same. The first step which was the approval of layout plan by the PMC on 10.02.2000 and thereafter, the approved building plan dated 25.10.2001 but the permission to build factually came vide agreement entered into between the PMC and the assessee dated 28.12.2001. Till the said agreement, under which terms were agreed upon for handing over 25% of the constructed area to the PMC, free of cost, the assessee could not have carried out any construction on the said project. Consequently, we find no merit in the stand of authorities below in holding that development rights in the piece of land which were acquired by the assessee in 1993 were its business assets. The second aspect which needs to be kept in mind is the NA order dated 28.02.2002, which gives permission for change in user of the agricultural land into non-agricultural purposes. Under the said order, not only the permission is given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n trade, then such declaration made by the assessee, which admittedly, has been accepted for the past more than eight years, cannot be disturbed by the Assessing Officer or the CIT(A) on the ground that whatever businessman acquires is business asset. We find no merit in the orders of authorities below in this regard and reverse the same. 32. The next stand of authorities below in denying the claim of assessee was holding that exercise undertaken by the assessee was an adventure in nature of trade. There is no merit in stand of authorities below in this regard, where in the facts of the case, the person acquires a property and holds the same for a period of time and no development takes place on the same and in the books of account, the assessee does not declare the same as stock in trade, which books of account had not been disturbed, then it is not correct to come to the conclusion that the exercise undertaken by the assessee was adventure in nature. We reverse the findings of authorities below in this regard. Once it is held that the assessee had acquired capital asset and the assessee converts the same into stock in trade by re-valuing the piece of land on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted, then the consequent thereto, is that no addition can be made on account of increase in work-inprogress. However, the business income as declared by the assessee on sale of developed portion of project is to be assessed in the hands of assessee. The assessee has developed commercial project i.e. KPCT and the business profits are directed to be assessed in the respective years as declared by the assessee. In view thereof, we hold that income declared by the assessee as capital gains under section 45(2) of the Act is to be assessed as such and not as business income which has been assessed by the authorities below. Secondly, there is no merit in grounds of appeal raised by the Revenue against the order of CIT(A) in deleting the addition on account of mismatching of workin-progress. Reversing the order of CIT(A) with regard to taxing the part of sale proceeds of KPCT project in the year as business income of the year, we direct the Assessing Officer to assess the same as long term capital gains under section 45(2) of the Act proportionately and also include business profits on the portion sold by the assessee. Consequently, the ground of appeal No.4 raised by the assessee is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal filed by the Revenue in assessment years 2007-08 and 2008-09, where the issue raised is in respect of rental income and the head under which the same is to be assessed. We refer to the facts and issues in ITA No.640/PUN/2011, relating to assessment year 2007-08 for adjudication of issue. 38. Brief facts relating to the issue are that the assessee had retained some shops and units in the project KPCT as owner. The assessee had rented out the same and had declared the income under the head Income from house property . The Assessing Officer was of the view that the income from letting out the unsold premises till they got sold was an activity which was incidental to the business of assessee. Further, the assessee had claimed expenses in respect of marketing of KPCT Mall and other related expenses since the unsold portion of entire project was shown as work-in-progress. The Assessing Officer was of the view that the income therefore, represents exploitation of commercial activity in the form of stock in trade and the rentals derived therefrom held in improving the marketability of the stock in trade. The Assessing Officer thus, held that the income of ₹ 2,26,82,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovable property by way of complex, commercial activities, then it was to be held as business income; but if the primary object of the assessee was to let out the property by any portion thereto, then the same had to be considered as rental income or income from property. Reference was also made to the ratio laid down by the Special Bench in the case of Atma Ram Properties reported in 102 TTJ (Del) (SB) 345, wherein it was held that even if the property was held as stock in trade in its capacity as trader, the rental income was not earned by it in the capacity of trader. The CIT(A) in this regard considered the explanation of assessee before the Assessing Officer that due to lack of proper market for shops contained in KPCT project, some of unsold shops were let out in the capacity of landlord. The CIT(A) also noted the plea of assessee that in case if the contention of the Assessing Officer regarding expenses booked for marketing of the project was found correct, then the same may not be allowed as deduction in computing the business income. Following the ratio laid down by the Apex Court and the Special Bench in the case of Atma Ram Properties (supra), the CIT(A) held that rental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which the Revenue was in appeal before the Hon ble High Court of Bombay. After hearing the submissions of assessee and relying on different decisions, the Hon ble High Court of Bombay held that the treatment given in the books of account by the assessee as stock in trade would not, therefore, alter the character or nature of the income as held by the Apex Court. The Hon ble High Court held that the said income is to be assessed under the head Income from property in the hands of assessee. 46. Similar proposition has been laid down by the Hon ble High Court of Delhi in CIT Vs. Ansal Housing Construction (supra), where the letting out of the property was not part of business and object of the assessee and in case the same assets are let out, then the same is to be assessed as Income from property . 47. Applying the said principle laid down by the Hon ble High Court of Bombay in CIT Vs. Sane Doshi Enterprises (supra) and the Hon ble High Court of Delhi in CIT Vs. Ansal Housing Construction (supra) and also the Special Bench of Tribunal and the Apex Court in earlier decisions, we hold that rental income received by the assessee on letting out unsold shops ..... X X X X Extracts X X X X X X X X Extracts X X X X
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