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TMI Blog2023 (1) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... shown to have been taken by the partners in showing such expenses in their personal account, as no such evidence is placed on record. Thus, the stand of partners is contrary. The formation of partnership was with the objects of doing business in real estate and such conduct is reflected as asset as business WIP are major factors which cannot be ignored. There is no clause in the partnership deed about making investment in the land and to earn capital gain only. When the expenses were incurred, it was shown at WIP, however, when the asset is sold, the partners claimed that it was as investment only and not business asset, which cannot be allowed. Thus, in our view the ld CIT(A) erred in treating / directing the assessing officer to treat the gain on sale of asset of firm as capital gain in place of business income. Thus, we reverse the order of ld CIT(A) and fully concur with the finding of assessing officer, with our aforesaid observation. Similarly, in none of the case, as relied by assessee, there was no dispute on the nature of asset. The facts in the present case is unique as initially it was introduced as capital contribution, development charges of FSI was paid in Surat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business of construction and development of property. The assessee filed its return of income for the A.Y. 2014-15 on 25/07/2014 declaring income of long term capital gain of Rs. 8,70,33,120/-. The case was selected for scrutiny. During the assessment, the Assessing Officer on perusal of computation of income and other details, found that the assessee has shown long term capital gain of Rs. 8.70 crores on sale of land admeasuring 4934 Square meters at block No. 157, T.P. No. 37, F.P. No. 36, being plot No. 36/A, Mauja-Althan, Surat. The Assessing Officer on further perusal of balance sheet, found that the assessee had shown Work in Progress (in short, WIP) of Rs. 89,26,594/- and in preceeding and WIP in current year at Rs. 1,78,53,187/-. The plot of land was held by assessee firm as stock in trade and not as an investment. On the basis of such discrepancies, the Assessing officer issued show cause notice dated 26/10/2016. In the show cause notice, the Assessing Officer asked the assessee as to why the profit on sale of such land may not be taxed under the head business income in place of capital gain . The assessee filed its reply on 09/11/2016. The contents of reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset. The formation of partnership with objects of doing business in real estate and reflecting the asset as business WIP are major factors which cannot be ignored. Though, the assessee had not commenced any business activity but the holding of the land was definitely for the purpose of the business. Non commencement of business does not convert the Stock in Trade into Capital Asset, automatically. The entries in the books of account and the final balance sheet also did not show the intentions of converting the stock into capital asset. Some part of the land is still on hold as per the balance sheet as business WIP. Therefore, the Assessing officer passed by the assessment order vide order dated 17/11/2016 by making the addition of Rs. 9,10,73,460/- by treating the same as business income. 4. Aggrieved by the treatment of capital gain as business income, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee filed detailed written submissions which is recorded in para 6 of the order of ld. CIT(A). The assessee submitted that the land was introduced as capital asset by the partners for the purpose of asset of the firm. The Assessing officer er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n certain case laws. 5. The assessee again vide its submission dated 25/2/2020 and 28/02/2020 repeated almost similar submission that the accountant of the firm has wrongly shown the land in the balance sheet as WIP. The assessee further vide its submission dated 06/03/2020 submitted that they have not carried out any business activity. 50% of land was sold to Landmark Corporation which was earlier introduced by the partners as their capital contribution which was lying as such without any development thereon. The assessee has constructed compound wall and payment to Surat Municipal Corporation for development and floor surface index (FSI) charges. The assessee by making reference to Circular of CBDT No. 4 of 2007 dated 15/06/2007 contended that to decide as to whether income from short term capital gain or business income, has been discussed by Bombay High Court in case of CIT Vs. Gopal Purohit (2011) 336 ITR 287 (Bom). If such criteria are applied on the impugned land, the impugned land of the assessee-firm is in the nature of surplus earned on sale of it would be capital gain and not business income . The assessee also tried to impress the different criteria whether asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. The incremental and FSI charges were paid in F.Y. 2010-11 and 2011-12. No other activities were made in the impugned land for seven years. The ld. CIT(A) on the basis of his observation held that the long holding period and absence of any activity for division of land into smaller plots, so the intention of assessee to hold the land for investment for its own business or for appreciation. A business venture required application of mind, efforts, employment skill and time by partners or by employees, no such application is seen in this case. The assessee firm has no office nor debited any expenses since inception. No utilization of human capital or man power. The assessee has not borrowed any capital etc. The ld. CIT(A) also referred certain case laws in para 7.5 of his order wherein gain on sale of land was held as business income wherein the lands were purchased and sold after plotting of land or after conversion into building site which was treated as business income and gain on such sales were treated as business income. The ld. CIT(A) held that no such activities are done by assessee, therefore, the sale of land cannot be said to be a business transaction, despite the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset automatically. The entries in the books of account and final balance sheet did not show any intention of partners of converting the stock into capital asset. Hence, the income arises on account of sale of WIP cannot be treated as long term capital gain which is nothing but a business income. The assessee himself has admitted before the ld. CIT(A) that they have paid incremental charges and charges of FSI in the office of Surat Municipal Corporation. Such charges can only be paid when the agricultural land was converted into non-agricultural land which itself clearly shows that the assessee was holding the land for business purposes only. The ld. CIT-DR submits that the assessee firm as per the partnership deed dated 02/10/2006, the partners brought the agricultural land, owned by them in their individual capacity as a capital contribution in firm. Further, the agenda provided that the said land shall be treated as asset of the firm on being registered in Form 7/12 record in the name of firm once the land was introduced as a capital contribution. 9. The ld. CIT-DR for the revenue further submits that when the land is not the asset of the firm, then how the capital gain can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded in Form 7/12 extract in the office of revenue authorities. As per law, the partnership firm cannot start business unless the impugned land is registered in the name of firm. After conversion of land into non-agricultural land, the firm has not taken step in its name to register the name of assessee in revenue records. The land was never used as a business asset. The ld. AR for the assessee further submits that as per the clauses in the partnership deed, the land was to be treated as asset of the firm only on registration in Form 7/12 record. The firm could not initiate business as the land was not registered in revenue record. The intention to do business will materialize only when the land become the asset of firm. So it can be said that there was no intention to do business. The firm was not registered for service tax. The land was held for almost 10 years. The appreciation in the value of land was only due to efflux of time and not on account of any business activities. The Assessing officer treated the and as business asset on the ground that in the books of account, the assessee has shown WIP. Such entry was made by mistake as shown the land as WIP. The value of WIP on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully. We have also deliberated on the various case laws relied upon by the lower authorities as well as by the ld. AR of the assessee. We find that in the return of income, the assessee firm had shown capital gain on sale of impugned land in the hand of assess-firm. However, the Assessing officer treated the said gain as business income by taking a view that assessee had mainly countered that the asset in question is a capital investment and not a business asset. The Assessing Officer held that assessee is a partnership firm, the partners have introduced land as business current asset in the firm, the balance sheet of the firm shows it as WIP, the matter ends without any further question mark. The assessee had himself categorized the asset as business asset. The Assessing Officer held that the assessee is trying to put in that the asset is a capital asset. The formation of partnership with objects of doing business in real estate and reflecting the asset as business WIP are major factors which cannot be ignored. The assessee had not commenced any business activity but the holding of the land was for the purpose of the business. Non commencement of business does not convert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the individual hand of the partners of assessee-firm. Surprisingly, the sale deed of the land was executed by partners of the assessee-firm. Again, no capital gain is shown in the hand of the partners for the reasons best known to them. Despite the fact the sale deed was executed by the partners, the capital gain is shown in the hand of assess-firm. The partners of the assessee-firm are acting in accordance with their whims and choice. Once, the land/ plot was introduced as a capital contribution, it loses its control from the hand of the partners of the assessee, as it became the asset of the assess-firm. Now, the partners are raising plea that the accountant of the firm has made wrong entry. No corrective step is shown to have been taken by the partners in showing such expenses in their personal account, as no such evidence is placed on record. Thus, the stand of partners is contrary. The formation of partnership was with the objects of doing business in real estate and such conduct is reflected as asset as business WIP are major factors which cannot be ignored. There is no clause in the partnership deed about making investment in the land and to earn capital gain only. When t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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