GIANSONS REALTIES PVT. LTD,NEW DELHI V. ITO, WARD-10(4), DELHI

ITA 1630/DEL/2024

AI Insights

Giansons Realties Pvt. Ltd. appealed against the order of the Commissioner of Income Tax (Appeals), which had upheld the Income Tax Officer's decision reclassifying the gains from the sale of two properties from long-term capital gains to business profits, and disallowing related deductions. The properties were initially purchased for business purposes but were later reclassified as long-term investments. The Tribunal found that the reclassification was legitimate and that the company had not engaged in tax evasion. The Tribunal also addressed the disallowance of a short-term capital loss on shares, which was initially rejected by the lower authorities based on the claim that the shares were from a penny stock company.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312922 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Other Referred Cases: McDowell & Company Limited vs. Commercial Tax Officer, Killick Nixon Ltd. Vs. DCIT, Sir Kikabhai Premchand Vs CIT(Central), Bombay, ACIT-1(3), Mumbai Vs M/s Superior Financial Consultancy Services Pvt. Ltd., Suresh Kumar Aggarwal vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTHA
• Assessee Lawyers: RANO JAIN
• Keywords: Business income; Capital asset; Fair market value; Cost of acquisition; Capital Gains; Principle of natural justice; TDS; Date of conversion; Borrowed satisfaction; Bogus
• Section: 147; 28

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.1630/Del/2024 (ASSESSMENT YEAR 2012-13) Giansons Realties Pvt. Ltd., HD-3, First Floor, Pitampura, New Delhi-110036 PAN-AACCG4978J Vs. Income Tax Officer, Wared-10(4), Delhi. (Appellant) (Respondent) Assessee by Ms. Rano Jain, Adv, Ms. Mansi jain, CA and Ms. Sakshi Rustogi, Adv. Department by Shri Rajesh Kumar Dhanestha, Sr. DR Date of Hearing 24/03/2025 Date of Pronouncement 30/04/2025 O R D E R PER MANISH AGARWAL, AM: This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals) [CIT(A), in short], National Faceless Appeal Centre (NFAC), Delhi dated 19.03.2024, for Assessment Year 2012-13 in appeal No. CIT(A),Delhi-4/10877/2019- 20 passed u/s 250 of the Income Tax Act, 1961 (the Act, in short). 2. Brief facts of the case are that assessee is a private limited company incorporated on 1.12.2005 with the main object to act as 2 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO builders, construction contractors and colonizers. The assessee company has purchased one property at B-15, Shivam Market, Indira Nagar for a total consideration of Rs.2,11,14,000/- in financial year 2005-06 and further incurred cost of Rs. 61,121,258/- in the year 2008-09 on improvement of the said property. Assessee company further purchased another property at Indira Nagar, Lucknow in financial year 2007-08 for a total consideration of Rs.4,46,520. Both of these properties were shown in the Balance Sheet as stock in trade till FY 2009-10. In FY 10-11, the assessee has converted the stock in trade in these two properties into the capital assets and accordingly shown them under the head “Long terms investments” in the Balance Sheet from FY 20010-11 and onwards. Thereafter, in the year under appeal both the properties were sold at Rs.7,09,50,000/- (Shiva Market property for Rs.7,00,00,000/- and Indira Nagar property for Rs. 9,50,000/-). The assessee after claiming the indexed cost of acquisition and improvement on both the properties, declared long- term capital gain at Rs. 2,68,24,236/-. The AO by holding that the assessee has converted the stock in trade to the capital asset with the primary motive of tax evasion and thus after disallowing the benefit of indexation towards cost of acquisition and cost of improvement and further by disallowing the deduction towards commission paid on sale, hold the profits of Rs. 4,93,99,480/- as business profits. Besides this the assessee has claimed short terms capital loss of Rs. 1,36,59,617/- from the sale of shares of M/s Ashutosh Papers Mills Limited which stood disallowed by holding the said company as penny stock company. 3 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 3. Against such order, the assessee preferred an appeal before ld. CIT(A) who dismissed the appeal of the assessee. Against the impugned order of ld. CIT (A,) present appeal is filed by the assessee before the Tribunal by taking following grounds of appeal: “1. On the facts and circumstances of the case, the order passed by the Hon'ble National Faceless Appeal Centre (NFAC) is bad, both in the eye of law and on the facts. 2. On the facts and circumstances of the case, the initiation of the proceedings under Section 147, read with Section 148, made by A.O. is bad and liable to be quashed as the condition and procedure prescribed under the statute have not been satisfied and complied with. 3. On the facts and circumstances of the case, NFAC has erred both on facts and in law confirming the order passed by the A.O. despite the fact that the initiation of the proceedings under Section 147, read with Section 148, made by A.O. is bad and liable to be quashed as the reasons on the basis of which the reassessment is initiated has no live link between the material and the belief formed. 4 (i) On the facts and circumstances of the case NFAC has erred both on facts and in law confirming the order passed by the A.O. despite the fact that the same having been made on the basis of reasons recorded without there being any independent application of mind. (ii) That the reassessment order passed by the A.O. is bad and liable to be quashed as the same has been reopened on the basis of the reasons which are vague and has been recorded only on borrowed satisfaction. 5. On the fact and circumstances of the case, NFAC has erred both on facts and in law confirming the order passed by the A.O. despite the fact that the reopening u/s 147 of the income tax Act, 1961 is bad in law having been made without obtaining valid approval from the prescribed authority as required u/s 151 of the Income Tax Act, 1961. 6.(i) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the action of the Ld. Assessing Officer (AO) in holding the transaction of transfer of property held as investment to be the transaction relating to the business of the assessee amounting to Rs.4,93,99,480/- 4 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO (ii) On the facts and circumstances of the case, theNFAC has erred both on facts and in law in confirming the said action of the Ld. AO ignoring the fact that it is only the intention of the assessee which is relevant to find out whether a transaction is that of sale of capital asset or business of the assessee. (iii) That the stock in trade having been converted into capital asset cannot be taxed in the absence of provisions of section 28(via) 49(9), which were inserted in the statute with effect from 01.04.2009 (iv) That the assessee having never done in business in real estate, one off transaction of sale of investment cannot be treated as business. 7.(i) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the action of Ld. AO innot allowing the assessee the benefit of indexation by holding the income to be taxed under the head business income and not under the head capital gain. (ii) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the action of Ld. AO innot allowing the assessee the benefit of improvement made by it on the property in question. (iii) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the above action of Ld. AO arbitrarily rejecting the explanation and evidences brought on record by the assessee. 8.(i) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the disallowance on account of commission paid on sale of property. (ii) That the above disallowance has been confirmed arbitrarily rejecting the explanation and evidences brought on record by the assessee. 9.(i) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the action of Ld. AO in disallowing the capital loss of Rs. 1,36,59,617/-on transfer of shares as claimed by the assessee. (ii) That the disallowance has been confirmed arbitrarily rejecting the explanation and evidences brought on record by the assessee. (iii) That the disallowance has been confirmed rejecting the contention of the assessee that the disallowance was made by Ld. AO on the basis of material collected at the back of the assessee without giving it an opportunity to rebut the same in gross violation of principle of natural justice. 5 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 10. The applicant craves leave to add, amend, or alter any of the grounds of appeal.” 4. Grounds of appeal No. 1 to 5 taken on reopening are not pressed thus are dismissed. 5. Grounds of appeal No 6 to 8 are in relation to the action of the AO in treating the capital gains as business profits and further against the disallowance of Commission paid and not allowing the indexed cost of acquisition and improvement claimed thereon, therefore, these grounds of appeal are taken together for consideration. 6. Before us, the learned AR of the assessee submitted that since main object of the assessee was of construction and purchased two properties to develop them for the residential or commercial complexes. However, when it was found that real-estate market was not in good shape and it was very difficult to sell the stock, therefore, in the interest of business, it was decided to drop the idea of construction of any complex on the said plots and to hold them as investments. Accordingly, in Financial Year 2010-11, both the properties were converted from stock in trade into capital assets and necessary entries were passed in the books of accounts. Further in the Balance Sheets as at 31.03.2011, the same were disclosed under the head ‘long term investments”. It is further submitted by ld. AR that assessee company had incurred cost of Rs. 61,21,258/- in FY 2008-09 towards the improvement of the property situated at Shiva market and the same was added to the purchases cost as recorded 6 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO in the books of accounts which was duly appearing in the financial statements made on regular basis. However, the AO solely for the reason that assessee could not be able to produce the evidences for such improvement, has disallowed the same. In this regard, it was submitted by ld. AR that the improvement was taken place in financial year 2008-09 and the AO asked to produce the evidences in 2019 i.e. after the expiry of more than 10 years. As per the provisions of Income Tax Act, an assessee should maintain and kept the books of accounts and other details for a period not more than 7 years and therefore, the precise details like bills etc. were not available. However, the fact that the work was carried out and duly recorded in the books of account is verifiable from the financial statements of the assessee company which were available before the AO. 7. It was further submitted by the ld. AR that payments towards the improvement was made by the sister concern M/s Giansons Foods and the outstanding balance payable (including cost of improvement) to such sister concern is appearing in the Balance Sheet as at 31.3.2012. For this the ld. AR drew our attention to paper book page 7, where in note number 8, under the title “long term loans and advances” a sum of ₹1,24,22,013.26 is appearing against M/s Giansons Foods which includes the amount paid by it towards the improvement work. 8. With regard to the payment of Commission, the ld. AR submitted that the assessee had filed all the relevant details of the 7 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO parties to whom Commission was paid. It is further submitted that the payments were made through banking channel after deducting tax at source and in the case of the director of the company, necessary confirmation was also filed. In the case of other two persons to whom commission was paid, it was submitted by the ld. AR that these persons were residing at Lucknow and assessee could not be able to file their confirmation before AO however, the same now available and can be produced for examination. It is further submitted that in the business of real estate, services of the agents for soliciting the deal is very common. It is also submitted that the Commission was paid at the prevailing market rates in the line of business. 9. On the issue of business profit vs. Capital gains, it is submitted by Ld. AR that assessee has not violated any provisions of law and the provisions for taxation at the time of conversion of stock in trade into capital asset has been brought in statute w.e.f. AY 2018-19. It is also submitted by ld.AR that assessee except these two properties had never sold any other property and all the properties were shown under the head “Long terms investments”. It is thus prayed by ld.AR that the profit from the sale of both the properties as declared by the assessee as Long terms capital gains after claiming the indexed cost of acquisition and improvement and further claim of commission deserves to be allowed. 10. On the other hand, ld. Sr. vehemently supported the orders of the lower authorities and submitted that in the instant case, assessee 8 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO has converted its stock in trade to capital asset with the sole motive of claiming the benefit of indexation and also to pay tax at lower rate of tax. For this he placed reliance on the jdugement of hon’ble Apex court McDowell & Company Limited vs. Commercial Tax Officer wherein the Hon’ble Supreme Court held that \"tax planning\" is acceptable if it is within the bounds of the law. However, the court strongly disapproved of \"colorable devices\" or \"dubious methods\" used to avoid tax liabilities, even if disguised as tax planning. He further placed reliance on the judgement of Hon’ble Bombay high court in the case of Killick Nixon Ltd. Vs. DCIT in ITA No.5518 of 2010 as relied by ld. CIT(A) and prayed for the confirmation of the order of the lower authorities. 11. After hearing both the parties and considering the material available on records, we find that in the instant case, assessee company has initially purchased these properties for the purpose of its business of construction. However, after passing of more than 5 years, when it was found that development of such properties for business purposes was not commercially viable, in the interest of business it was decided to hold these properties as long- term investments and to be sold as and when good opportunity come. From the perusal of the financial statements as available in the paper book filed by the assessee, we find that in the balance sheets as at 31.3.2011, these properties are disclosed as long-term investments by the assessee company. The ITAT Mumbai \"E\" Bench while deciding ITA No. 4208/Mum/2007 in the case of ACIT-1(3), Mumbai Vs M/s 9 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO Superior Financial Consultancy Services Pvt. Ltd. on relying on the decision of Hon'ble Supreme Court in the case of Sir Kikabhai Premchand Vs CIT(Central), Bombay reported in 24 ITR 506 has held as under: \"6. We have heard the parties and perused the material on record. It is relevant to state that the ld. CIT(A), for the purpose of deciding the case has elaborately discussed three main issues, namely (i) whether the assessee can legally convert its stock-in- trade into investments, (ii) if yes, whether the conversion is motivated by tax avoidance and (iii) if not, whether the assessee can claim to be an investor in some shares while doing speculation in other shares. 6.1 As regards the legality of conversion of stock-in- trade into investments, the Ld. CIT has correctly held that there is no specific bar for the said conversion and vice versa in view of the decision of the Hon'ble Supreme Court in the case of Sir Kikabhai Premchand (24 ITR 506) (SC) wherein it has been held that such conversion is not something not known to the commercial world and there is no legal bar on the same.” 12. There is no specific bar for conversion of stock in trade into investment and vice versa in view of the decision of the Hon'ble Supreme Court in the case of Sir Kikabhai Premchand (supra). The act of the assessee in converting the stock in trade into capital asset is not against any law prevailing at the relevant time. This view is also getting strength from the Memorandum of Financial Bill, 2018 through which the provision relating to taxation at the time of conversion of stock in trade into capital assets brought into statute. The relevant para of Memorandum of Financial Bill, 2018 is reproduced as under: 10 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO Rationalisation of provision relating to conversion of stock-in- trade into Capital Asset Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability. In order to provide symmetrical treatment and discourage the practice of deferring the tax payment by converting the inventory into capital asset, it is proposed to amend the provisions of – (i) Section 28 so as to provide that any profit or gains arising from conversion of inventory into capital asset or its treatment as capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment; (ii) clause (24) of section 2 so as to include such fair market value in the definition of income; (iii) section 49 so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition; (iv) clause (42A) of section 2 so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment. These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years. [Clause 3, 9 & 18]. 11 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 13. In the Memorandum of Financial Bill, 2018, it has been categorically stated that where the stock in trade is converted into capital asset or investment, the existing law does not provide for its taxability and to provide symmetrical treatment and discourage differing the tax payment, the amendments have been carried out. 14. As the assessee has acted in bonafide manner and in the interest of business for safeguard of future losses, it cannot be termed as colorable device developed to avoid tax liability. Since prior to the above amendment there was no provision in the Act to tax the conversion of stock-in-trade into capital assets thus the action of the assessee should not be doubted. It is settled law that every action cannot be doubted as being taken to avoid the tax liability. In view of these facts and circumstances of the case, we hold that the income arisen from the sale of both the properties is to be charged to tax as long term capital gains and assessee is eligible for benefit of indexation as per the provisions of the Act. We order accordingly. 15. Now coming to the issue of allowability of cost of improvement and Commission expenses paid at the time of sale. From the records, it is seen that assessee has incurred cost of improvement of ₹61,21,258/- in financial year 2008-09 for which necessary entries were made in the books of accounts. It is also seen that the payments were made by the sister concern of assessee company M/s Giansons Foods and balance outstanding as payable to the said firm is duly appearing in the balance sheet of the assessee company. Thus, under these circumstances it cannot be said that no expenses were incurred 12 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO merely because the assessee could not be able to file the copies of evidences towards improvement work carried out. Since the improvement was taken place in the financial year 2008-09 and the assessing officer asked the assessee to file these details in the year 2019, therefore, after a lapse of so much of the time, it is acceptable that such details were not available. However, undoubtedly these expenses are duly recorded in the books of accounts thus cannot be doubted. Accordingly, the same are hereby allowed to be deducted out of the total sale consideration alongwith the benefit of indexation available as per law. 16. Regarding the Payment of Commission, we find that a sum of Rs. 9,00,000 was paid to the director of the assessee company and the payment was made after deduction of tax at source through banking channel. The necessary confirmation of the director was also submitted before the lower authorities which is available in the paper book page 248. Further the copies of the Ledger accounts of other two persons namely Shri Ram Singh and Shri Muni Singh to whom Commission of Rs. 5.00 lacs each paid after TDS were also filed. From the perusal of the same, it is evident that the payments were made to them through banking channel and TDS was also deducted and the copy of TDS certificates containing their PAN details were also filed by the assessee, therefore, the payments made to these persons as Commission cannot be disallowed. Accordingly, we direct to allow the same to the assessee. 13 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 17. In view of the above discussions, grounds of appeal No. 6 to 8 taken by assessee are allowed. 18. Ground of appeal No. 9 taken by the assessee is in relation to disallowance of capital loss of Rs.1,36,59,617/- claimed on the transfer of shares. 19. Briefly stated the facts are that, during the year under appeal, assessee has purchased shares of M/s Ashutosh Paper Mills Ltd which were sold at a loss of Rs. 1,36,59,617/- and claimed short terms capital loss. The AO based on the information available with him that the company M/s Ashutosh Paper Mills Ltd was penny stock company, held that the loss suffered by the assessee is bogus and, accordingly, disallowed the same. 20. Before us, the Ld. AR submitted that the assessee company has bought these shares with the sole motive of making profits. The shares were purchased through member broker M/s MSB e-trade Securities Ltd. and shares were purchased in online portal of the stock exchange. It is further submitted by Ld. AR that the shares were sold through online portal and all the evidences like contract notes of purchases and sales, bank statements, Demat ledger account, statement of account of broker etc. were also submitted before the AO. The assessee has not violated any legal or procedural compliance and was not aware whether any manipulation was carried out in the shares of the company i.e. Ashutosh Paper Mills. 14 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 21. It is further submitted by the Ld. AR that no specific evidence against assessee that assessee was also brought on record involving the assessee in manipulation of shares of Ashutosh Peper Mills to support the allegations made by the AO. Thus, the same cannot be held as a sham transaction. Relevant copies of the contract notes statement of accounts, bank statements etc. in respect of the transfer of shares as filed before the lower authorities are available in the paper book pages 192 to 211. It is thus humbly prayed by the Ld. AR that the AO has wrongly disallowed the loss claim by the assessee on the sale of shares which deserves to be allowed. 22. On the other hand, the Ld. CIT-DR vehemently supports the orders of the lower authorities and submitted that the AO based on the information available with it that company Ashutosh Paper Mills is a penny stock company and, therefore, any trading made in the shares is not genuine and has rightly disallowed the claim of the assessee. He further submitted that the AO had duly informed the assessee about the enquiries and SEBI report and, therefore, it cannot be said that no proper opportunities was provided to the assessee. Accordingly, he prayed for the confirmation of the disallowance of loss so made by the lower authorities. 23. We have heard the rival submissions and perused the material available on record. In the instant case, the assessee company has purchased shares of Ashutosh Paper Mills Ltd. which is a company listed with stock exchange limited and these shares were purchased 15 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO through a member broker via online system portal of stock exchange. The assessee to prove the genuineness of the transaction as submitted the following documents: (i) contract notes for purchase of shares. (ii) contract notes for sale of shares. (iii) copy of ledger account of the assessee in the books of the trading M/s MSB e-Traders Securities Pvt. Ltd. (iv) Copy of the ledger account of broker in the books of the assessee company. (v) copy of bank statements, evidence of payments made and letter received of demat account of the assessee. (vi) Copy of DMAT account statement regarding holding of shares 24. From the details filed by the assessee and perusal of the assessment order, we find that nowhere in the order, it is alleged by the AO that some information was available that the assessee had entered into the sham transaction of bogus short terms capital loss in the shares of company M/s Ashutosh Paper Mills Ltd. Solely on the basis of the enquiries conducted by the SEBI against the company, it was held that loss suffered by the assessee is bogus. The Co-ordinate Bench of ITAT, Delhi in the case of Suresh Kumar Aggarwal vs. ACIT in ITA No.8703/Del/2019 under identical facts held that the assessee has discharged his onus and there was nothing on record to prove that AO has recovered any evidences against the assessee. 16 ITA No.1630/Del/2024 Giansons Realties Pvt. Ltd. vs. ITO 25. In view of the above discussion and looking to the facts that assessee has produced every plausible evidence to establish that the transaction of purchase and sale of shares of M/s Ashutosh Paper Mills is a genuine transaction and no contrary evidence whatsoever was brought on record by the AO excepting referring to SEBI enquiry wherein nowhere assessee was alleged as one of the beneficiaries. Therefore, the short terms loss suffered by the assessee cannot be treated as bogus. Accordingly, the short term capital loss of Rs.1,36,59,617/- is allowed as genuinely suffered by the assessee. The ground of appeal No.9 taken by assessee is allowed. 26. As a result, the appeal of the assessee is allowed. Order is pronounced in open court on 30.04.2025. Sd/- Sd/- (MAHAVIR SINGH) (MANISH AGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 30/04/2025 PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI "