ACIT, CHENNAI V. M/s. MPL Cars Pvt Ltd., CHENNAI

ITA 1276/CHNY/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8314 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 05-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-07-2011
• Court: TRIBUNAL
• Department Lawyers: V VIVEKANANDAN
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business income; Date of conversion
• Section: 45(2)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . ! , ' !# $ [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ] ./ I.T.A.NO.1276/MDS/2011 & 1056/MDS/2013 / ASSESSMENT YEAR : 2008-09 & 2009-10 THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE IV(3) CHENNAI VS. M/S MPL CAR S PVT. LTD NO.20, THANIKACHALAM ROAD T. NAGAR, CHENNAI [PAN AACCM 3044 R ] ( %& / APPELLANT) ( '(%& /RESPONDENT) / APPELLANT BY : SHRI V VIVEKANANDAN, CIT /RESPONDENT BY : SHRI S SRIDHAR, ADVO CATE / DATE OF HEARING : 05 - 11 - 2015 / DATE OF PRONOUNCEMENT : 8 - 01 - 2016 ) / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS OF THE REVENUE ARE DIRECTED AG AINST DIFFERENT ORDERS OF COMMISSIONER OF INCOME-TAX (AP PEALS)-V, CHENNAI, FOR ASSESSMENT YEARS 2008-09 AND 2009-10. SINCE CO MMON ISSUE IS INVOLVED IN THESE APPEALS, THEY WERE CLUBBED TOGETH ER, HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SA KE OF CONVENIENCE. ITA NO.1276/11 1056/13 :- 2 -: 2. AS THE FACTS ARE COMMON, WE NARRATE THE FACTS OF ASSESSMENT YEAR 2008-09 IN I.T.A.NO. 1276/MDS/2011. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS PRI VATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF DEALING IN CARS IN THE NAME AND STYLE OF MPL CARS PVT. LTD. THE ASSESSEES MAIN BUSINESS IS DEALERSHIP OF FORD VEHICLES AND SERVICING THEREOF. THIS BUSINESS OF DEALING IN CARS IS CARRIED ON BY THE ASSESSEE SINC E 1999 AND CONTINUED TILL DATE. THE ASSESSEE HAD A SERVICE CENTRE AT 23 /1, B-3, TAMBARAM VELACHERY MAIN ROAD, PALLIKARANAI AND THE LAND AND BUILDING OF WHICH WAS ACQUIRED BY THE ASSESSEE COM PANY IN 1999 AT THE TIME OF DEMERGER OF MPL PARTS & SERVICES PVT. LTD. BY MEANS OF A TRANSFER DEED DULY REGISTERED ON 03.11.1999. DURING THE ASSESSMENT YEAR 2008-09 RELEVANT TO THE FINANCIAL YEAR ENDING 31-03-08, THE ASSESSEE HAS SOLD A PART OF THE SAID LAND AFTER CON STRUCTING THEREON A IT PARK CALLED MPL INFINITY. THE CONSTRUCTION OF TH E SAID BUILDING APPEARS TO HAVE STARTED IN 2006 AFTER OBTAINING CMD A PERMISSION AND AFTER DEMOLISHING THIS SERVICE CENTRE. THE SAID BUI LDING ALONG WITH PROPORTIONATE LAND WAS SOLD ON 05/01/200 8 TO M/S. CHEMOIL AND M/S. CALIFORNIA SOFTWARE PVT. LTD. (NOMINEE OF CHEMOIL). ITA NO.1276/11 1056/13 :- 3 -: 4. THE ASSESSING OFFICER TREATED THE INCOME OFFERED BY THE ASSESSEE UNDER THE HEAD CAPITAL GAINS AS INCOME FROM BUSINESS ON THE FOLLOWING REASONING: 1) THE ASSESSEE WANTED TO MAKE USE OF THE RISING RE AL ESTATE BUSINESS. 2) THE ASSESSEE ITSELF HAS TREATED THE CONSTRUCTION AC TIVITY AS ITS BUSINESS AS EVIDENCED BY THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET. 3) THE MAIN OBJECTS OF THE APPELLANT AS CONTAINED IN I TS MEMORANDUM OF ASSOCIATION INCLUDE AS ITEM NO:5 'TO DEVELOP, CO NSTRUCT, ACQUIRE, LEASE AND MAINTAIN INFORMATION TECHNOLOGY PARKS AND SOFTWARE DEVELOPMENT PARKS AND EQUIP THE SAME WITH ALL INFRA STRUCTURE AND TO DEAL WITH THE SAME IN ANY MANNER'. 4) THE APPELLANT HAS DEVELOPED THE LAND IN A PLANNED M ANNER BY GETTING PLAN PERMIT, BUILDING LICENCE, NOC'S ETC., AND THIS CLEARLY SHOWS THAT THE INTENTION OF THE APPELLANT WAS TO EX PLOIT THE LAND, DEVELOP IT FOR CONSTRUCTION OF IT PARK SUBSEQUENTLY SELL IT AND MAKE PROFIT. 5) THOUGH THE COMPANY'S SERVICE CENTRE WAS FUNCTIONING IN THE SAID LAND, THE COMPANY' INTENTION TO EXPLORE THE PR OPERTY FOR BUSINESS PURPOSE IS ESTABLISHED BY THE VERY FACT TH E THE PRELIMINARY WORK STARTED IN THE YEAR 2005, AN AGREE MENT WITH A PROJECT ENGINEER WAS ALSO ENTERED INTO IN THE SAID YEAR 2005 IN TERMS OF WHICH THE PROJECT ENGINEER WAS TO BE ALLOTTED A CERTAIN AMOUNT OF BUILT-UP AREA AND CAR PARKING AREA FREE O F COST, PROVING THE FACT THAT THE APPELLANT HAD PLAN TO DEVELOP THE LAND, CONSTRUCT AN IT PARK AND SELL THE SAME IN ORDER TO MAKE HAY W HILE THE REAL ESTATE SECTOR WAS IN A BOOM WHICH IS NOTHING BUT A BUSINESS ACTIVITY. 6) EVEN BEFORE THE SALE OF THE IT PARK-I IN THE YEAR 2 008 THE APPELLANT HAD NOT ONLY CONSTRUCTED IT PARK II KNO WN AS MPL SILICON TOWERS, BUT HAD ENTERED INTO DEVELOP AGREEM ENTS WITH THE PURCHASERS WHEREIN THE ASSESSEE IS STATED AS A DEVELOPER. ITA NO.1276/11 1056/13 :- 4 -: 5. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE PURCHASED THE PROPERTY IN THE YEAR 1999 TO CARRY ON THE BUSINESS OF DEALERSHIP OF FORD CAR AND RUNNING A SERVICE CENTRE FOR THE SAME. IT WAS NOT THE INTENTION TO RESELL THE PROPERTY. THE ASSESSEE ACQUIRED THE PROPERTY AND ONLY BECAUSE OF LULL IN THE BUSIN ESS THE ASSESSEE WAS FORCED TO SELL THE PROPERTY SO AS TO REALIZE TH E INCOME. ACCORDING TO HIM, THE SURPLUS INCOME GENERATED FROM THE SALE OF PROPERTY IS CAPITAL GAIN ONLY AGAINST WHICH THE REVENUE IS IN A PPEAL BY RAISING THE FOLLOWING GROUNDS: 2.1 THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE INCOME OUT OF SALE OF PROPERTY UNDER THE HEAD C APITAL GAINS AS AGAINST INCOME CONSIDERED BY THE ASSESSING OFFICER UNDER THE HEAD BUSINESS. 2.2 THE LD. CIT(A) FAILED TO NOTE THAT THIS IS NOT A CASE OF OCCASIONAL CAPITAL GAINS ARISING TO THE ASSESSEE BUT A WELL PL ANNED AND ORGANISED BUSINESS COURSE OF ACTIVITY BY WHICH THE ASSESSEE H AS OBTAINED PROFITS. 2.3 HAVING REGARD TO THE FOLLOWING DECISION THE L D. CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE ASSESSING OFFICER. 1. G. VENKATASAMY NAIDU & CO. (35 ITR 594) (1959)(SC) 2. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD -100 ITR 706 (SC). 2.4 THE LD. CIT(A) FAILED TO APPRECIATE THE PURPOSE AND MOTIVE BEHIND DEVELOPING THE LAND AND THIS COUPLED WITH VARIOUS F ACTS IN THE FINANCIAL STATEMENTS CLEARLY PROVED THAT PROFITS ARE TO BE TA XED AS INCOME FROM BUSINESS. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THIS CASE, THE ASSESSEE ACQUIRED THE S AID PROPERTY IN THE ITA NO.1276/11 1056/13 :- 5 -: YEAR 1999. ACCORDING TO THE ASSESSEES COUNSEL, D URING THE ASSESSMENT YEAR 2008-09, THE ASSESSEE SOLD THE BUI LDING IT PARK-I AND THE INCOME GENERATED FROM THE SALE HAS TO BE CO NSIDERED AS INCOME FROM CAPITAL GAINS. THE ASSESSEE-COMPANY DU RING THE YEAR 2004, THAT IN VIEW OF THE BLOOMING REAL ESTATE MARK ET AND NEED FOR INFORMATION TECHNOLOGY SECTOR, DECIDED TO SHIFT TH E WORKSHOP AND SERVICE CENTER TO A RENTED PREMISES AND CONSTRUCT AN IT PARK. THE ASSESSEE HAS SHOWN THE CONSTRUCTION OF THE BUILDIN G AS CAPITAL WORK- IN-PROGRESS AND THE PROJECT EXPENSES AS DIRECT EXPE NSES. THE ASSESSEE GOT PLANNING PERMISSION FROM CMDC AND NOC FROM VARIOUS DEPARTMENTS TO START IT PARK AND ALSO PRIMARILY WOR K STARTED IN 2005. THE ASSESSEE ENTERED INTO AGREEMENT WITH A PROJECT ENGINEER IN THE YEAR 2005 FOR THE PURPOSE OF CONSTRUCTION OF IT PAR K. SO THE INTENTION OF THE ASSESSEE IN THE YEAR 2005 WAS TO DEVELOP AN IT PARK. IT MEANS THAT IN THE YEAR 2005, THE ASSESSEE CONVERTED ITS INVESTMENT INTO STOCK-IN-TRADE. THERE WAS NO RESTRICTION FOR THE ASSESSEE TO HOLD THE LAND EITHER AS A BUSINESS ASSET OR AS AN INVESTMENT AND ALSO THERE WAS NO BAR ON THE ASSESSEE IN UNDERTAKING ALONGWTH ITS BUSINESS DEVELOPING IT PARK IN A LAND WHICH WAS ORIGINALLY T REATED AS FIXED ASSET IN ITS BOOKS OF ACCOUNT. THE ASSESSEE BY ENTERING INTO AN AGREEMENT WITH PROJECT ENGINEER IN THE YEAR 2005 FOR DEVELOPM ENT OF IT PARK, THE ASSESSEE CONVERTED THE FIXED ASSET INTO STOCK-IN-TR ADE. THE ASSESSING ITA NO.1276/11 1056/13 :- 6 -: OFFICER HAS NOT BOTHERED TO EXAMINE THE NATURE OF A CTIVITY CARRIED ON BY THE ASSESSEE AND HE STRAIGHT AWAY TREATED THE ASSESSEE IS ENGAGED IN THE BUSINESS OF LANDED PROPERTY. THOUGH THE ASSESSEE HAS TREATED THE LAND AS INVESTMENT IN ITS BOOKS OF ACCOUNT AND ONLY IN THE YEAR 2005 IT WAS CONVERTED INTO STOCK-IN-TRADE AS THE EVIDENCE BROUGHT ON RECORD SHOWS THAT THE ASSESSEE CONVERTE D THE LANDED PROPERTY INTO STOCK-IN-TRADE IN THE YEAR 2005. LOO KING INTO THE INTENTION OF THE ASSESSEE IN THE YEAR 2005, AFTER HOLDING THE PROPERTY FOR LONG TIME IT WANT TO CHANGE THE USE OF THE PROP ERTY BY DEVELOPING IT PARK. BEING SO, UPTO 2005, THE ASSET SHOULD BE CONSIDERED AS FIXED ASSET AND PROVISIONS OF SEC. 45(2) TO BE APPLIED FO R THE PURPOSE OF DETERMINING THE INCOME. SEC. 45(2) OF THE ACT DEAL S WITH CONVERSION BY OWNER OF A CAPITAL ASSET INTO STOCK-IN-TRADE WH ICH GENERATES PROFITS OR GAINS. THESE PROFITS AND GAINS ARE TAXABLE IN THE ASSESSMENT YEAR IN WHICH THE SAID STOCK-IN-TRADE OR THE BUSINESS AS SET IS SOLD. DATE OF CONVERSION IS TREATED AS THE DATE OF TRANSFER FOR T HE PURPOSE OF SEC. 48 OF THE ACT. FULL VALUE OF CONSIDERATION IS THE FAI R MARKET VALUE OF THE SAID CAPITAL ASSET ON THE SAID DATE OF CONVERSION. THE ABOVE PROVISION PROVIDED FOR THE COMPUTATION AND IT IS DONE IN TWO STEPS. FIRSTLY MARKET VALUE AS ON THE DATE OF THE CONVERSION HAS T O BE ASCERTAINED IN RESPECT OF THE PROPERTY SOLD DURING THE YEAR. THE DIFFERENCE BETWEEN THE MARKET VALUE OF THE PROPERTY AND THE COST OF AC QUISITION HAS TO BE ITA NO.1276/11 1056/13 :- 7 -: ASSESSED UNDER THE HEAD CAPITAL GAINS. THE SECOND STEP IS TO FIND OUT BUSINESS INCOME FOR FINDING OUT THE DIFFERENCE BETW EEN THE SALE PRICE AND THE MARKET PRICE ON THE DATE OF CONVERSION OF T HE STOCK-IN-TRADE. 7. IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE, THE OWNER OF THE CAPITAL ASSET CONVERTED THE SAME INTO STOCK-IN- TRADE IN THE YEAR 2005. THOUGH THE ASSESSEE CONVERTED THE INVESTMEN T AS STOCK-IN- TRADE, IT OFFERED THE CAPITAL GAINS FROM THE TRANSA CTION IN THESE TWO ASSESSMENT YEARS AS INCOME FROM CAPITAL GAINS. IT IS NOT CORRECT. IN OUR OPINION, THE ASSESSING OFFICER HAS TO COMPUTE T HE INCOME UNDER TWO HEADS BY APPLYING SEC. 45(2) THOUGH THE ASSES SEE HAS RAISED A GROUND RELATING TO APPLICABILITY OF PROVISIONS OF S EC. 45(2) BEFORE THE CIT(A). THE CIT(A) WRONGLY OBSERVED THAT THE INCOM E GENERATED FROM THE DEVELOPMENT OF IT PARK TO BE CONSIDERED AS CAPI TAL GAINS WHICH IS NOT APPROPRIATE. IN OUR OPINION, THE ENTIRE ISSUE HAS TO BE RELOOKED BY THE ASSESSING OFFICER SO AS TO APPLY THE PROVISIONS OF SEC. 45(2) OF THE ACT AND HE HAS TO COMPUTE THE INCOME UPTO THE DATE OF CONVERSION AS INCOME FROM CAPITAL GAINS AND THEREAFTER INCOME HAS TO BE COMPUTED AS INCOME FROM BUSINESS. THE STAND OF THE ASSESSE E RIGHT FROM THE BEGINNING AND EVEN NOW BEFORE US THAT CAPITAL ASSET IN QUESTION ARE ITS INVESTMENT AND ANY GAIN ON SALE IS CAPITAL GAIN AND NOT BUSINESS. THIS IS NOT BASED ON ANY SOUND PRINCIPLES. THE ASSESSE E HAS CONVERTED THE PROPERTY AS STOCK-IN-TRADE IN THE YEAR 2005 WH EN IT ENTERED INTO ITA NO.1276/11 1056/13 :- 8 -: AN AGREEMENT WITH PROJECT ENGINEER AND FROM THAT DA TE ONWARDS THE ASSESSEES LANDED PROPERTY IS TO BE CONSIDERED AS S TOCK-IN-TRADE AND INCOME GENERATED FROM THE TRANSFER THEREAFTER HAS T O BE CONSIDERED AS BUSINESS INCOME ONLY. TO THAT EXTENT, WE REMIT THI S ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR RE-COMPUTATION OF INCOME AS INDICATED ABOVE. ACCORDINGLY, BOTH THE APPEALS OF THE REVENUE ARE AL LOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH JANUARY, 2016, AT CHENNAI. SD/- SD/- ( . ! ) (G. PAVAN KUMAR) ' / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER !' / CHENNAI #$ / DATED: 8 TH JANUARY, 2016 RD $%&& '(&)( / COPY TO: & 1 . / APPELLANT 4. & * / CIT 2. / RESPONDENT 5. (+,& - / DR 3. & *&./ / CIT(A) 6. ,0&1 / GF