ITO 19(1)(3), MUMBAI V. CHAUDHARI ENTERPRISES, MUMBAI

ITA 1430/MUM/2012

• Counselvise Citation: 143019914 RSA 2012
• Duration Of Justice: 1 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 01-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEEPAK KUMAR SINHA
• Keywords: Capital asset; Business income; Charitable institution; Fair market value; Capital receipt
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH , MUMBAI , BEFORE SHRI R.K.GUPTA , J M & SHRI R AJENDRA SINGH , A M TA NO. 1430 / MUM / 20 1 2 ( ASSESSMENT YEAR : 200 8 - 09 ) ITO 19(1)(3) , MUMBAI - 12 VS. M/S CHAUDHARI ENTERPRISES, 354, LINKING ROAD, KHAR (W), MUMBAI - 400 052. PAN/GIR NO. : A A DF C 2162 L ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI DEEPAK KUMAR SINHA /ASSESSEE BY : SHRI NISHIT GANDHI DATE OF HEARING : 4 TH S E PTEMBER , 201 3 DATE OF PRONOUNCEMENT : 11 TH SEPTEMBE R , 2013 O R D E R P ER SHRI R.K.G UPTA, JM : THE DEPARTMENT HAS PREFERRED THIS APPEAL AGAINST THE ORDER OF LEARNED CIT(A) , MUMBAI FOR ASSESSMENT YEAR 200 8 - 09 . 2 . THE DEPARTMENT IN ITS APPEAL HAS RAISED OBJECTION IN REGARD TO DIRECTING THE A O TO TREAT THE COMPENSATION RECEIVED BY THE ASSESSEE AS CAPITAL GAIN AGAINST THE BUSINESS INCOME AFTER HOLDING THAT THE ASSESSEE AS SATISFIED BOTH THE CONDITIONS OF TREATING THE INCOME AS CAPITAL GAIN I.E. I) EXISTENCE OF CAPITAL ASSET AND II) TRANSFER OF THE CAPITAL ASSET . SUPPORTING ARGUMENTATIVE GROUND I.E. GROUNDS NO. 2 & 3 HAVE ALSO BEEN TAKEN BY THE DEPARTMENT. HOWEVER, THE ISSUE IS ONLY ONE AS MENTIONED ABOVE. I TA NO. 1430 /1 2 2 3 . BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM . THE ASSESSEE DECL ARED NIL INCOME. THEREAFTER THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) . DURING THE ASSESSMENT PROCEEDING, IT WAS FOUND THAT THE ASSESSEE HAS RECEIVED COMPENSATION OF RS. 81,00,000/ - IN LIEU OF THE FLAT AGREED TO BE PURCHASED BY THE ASSESSEE. THE ASSE SSEE WAS REQUIRED TO EXPLAIN AS TO WHY THE COMPENSATION RECEIVED SHOULD NOT BE TREATED AS BUSINESS RECEIPTS. IT WAS EXPLAINED THAT THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH SAMEER CONSTRUCTION CORPORATION TO BUY FLATS OF A TOTAL AREA OF 12,600 SQ.FT. FOR A CONSIDERATION OF RS. 57,58,200/ - OUT OF WHICH A SUM OF RS. 11,00,000/ - WAS PAID AS ADVANCE. BY ANOTHER AGREEMENT DATED 8 - 2 - 1995 ADDITIONAL FLATS COMPRISING 12,600 SQ.FT. AREA WERE BOUGHT BY THE ASSESSEE FOR THE SAME CONSIDERATION AND ADVANCE OF RS. 11, 00,000/ - WAS PAID TO SAMEER CONSTRUCTION CORPORATION. HENCE, A TOTAL AMOUNT OF RS. 22,00,000/ - WAS PAID AS ADVANCE INITIALLY. THEREAFTER THE SAMEER CONSTRUCTION CORPORATION VIDE AGREEMENT DATED 30 - 4 - 1995 SOLD THE DEVELOPMENT RIGHTS TO FOUR ACE CONSTRUCTIONS . THEREAFTER ON 2 - 5 - 1995 UNDER A DEED OF CONFIRMATION BETWEEN THE ASSESSEE , THE CORPORATION AND THE FOUR ACE CONFIRMED THE EXECUTION OF THE AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AND THE CORPORATION. THE SAME WAS ADMITTED, ACKNOWLEDGED AND RATIFIED B Y FOUR ACE, HENCE, THE FOUR ACE AGREED TO SELL THE FLATS TO THE ASSESSEE. THE FOUR ACE HAD ALSO ENTERED INTO AN AGREEMENT FOR SALE OF FLATS ADMEASURING A TOTAL AREA OF 12,600 SQ.FT. IN THE PROPOSED BUILDINGS TO FIVE OTHER PARTIES AND I TA NO. 1430 /1 2 3 RECEIVED AND ADVANCE OF RS. 9,31,000/ - . HOWEVER, FOUR ACE WAS UNABLE TO START WITH THE PROPOSED CONSTRUCTION. HENCE, BY AN AGREEMENT DATED 15 - 10 - 1996, IT WAS DECIDED TO ALLOT THE ASSESSEE 65,000 SQ.FT. OF FSI TO BE UTILIZED AND CONSUMED IN THE FOUR BUILDINGS IN LIEU OF THE FLAT S. FURTHER IT WAS DECIDED THAT THE ASSESSEE WILL ALSO SETTLE THE CLAIMS OF THE FIVE PARTIES. ACCORDINGLY, THE ASSESSEE SETTLED THE CLAIM OF THESE FIVE PARTIES. HOWEVER, DUE TO CERTAIN DISPUTES AND DIFFERENCES BETWEEN THE PARTIES, THE SAID LAND COULD NOT BE DEVELOPED. DURING THE SUBSISTENCE OF THE AGREEMENT BETWEEN THE ASSESSEE AND FOUR ACE, EXCEPT FOR LAND ADMEASURING 2000 SQ.MTR.S, THE OWNERS, NAMELY, MADANLAL MALHOTRA & MURILAL MALHOTRA SOLD AND CONVEYED THE REMAINING PROPERTY TO JETHALAL LAKHAMSHI PUBLI C CHARITABLE TRUST (THE TRUST) . THE TRUST PROPOSED TO DEVELOP THE PROPERTY THOUGH BHAVYA ENTERPRISES. SUBSEQUENTLY, A SETTLEMENT WAS ALSO ENTERED INTO BETWEEN THE ASSESSEE AND THE FOUR ACE WHEREBY BARRING THE DEVELOPMENT RIGHTS IN THE LAND ADMEASURING 20 00 SQ.MTRS. THE DEVELOPMENT RIGHTS IN THE REMAINING PORTION OF THE LAND WERE SURRENDERED BY THE ASSESSEE TO FOUR ACE. AS PER THE SETTLEMENT THE ASSESSEE WAS TO RECEIVE A SUM OF RS. 31,00,000/ - AND 5555 SQ.FT. OF CONSTRUCTED PREMISES ON ENTERING INTO A DEVEL OPMENT AGREEMENT WITH BHAVYA ENTERPRISES BEING THE FAIR MARKET VALUE OF THE FLATS WHICH WAS SUPPOSED TO BE GIVEN TO THE ASSESSEE AS PER THE ORIGINAL DEAL AS ENVISAGED IN THE AGREEMENT DATED 27 - 1 - 1995 AND 8 - 2 - 1995. ACCORDINGLY THE ASSESSEE RECEIVED RS.31,00 ,000/ - ON 7 - 1 - 2005. THEREAFTER BY A DEVELOPMENT AGREEMENT I TA NO. 1430 /1 2 4 ENTERED INTO IN DECEMBER, 2004 THE DEVELOPMENTS RIGHTS IN 2000 SQ.MTRS. OF LAND HELD BY THE ASSESSEE WERE TRANSFERRED TO BHAVYA ENTERPRISES AND IN RETURN THE ASSESSEE WAS TO RECEIVE CONSTRUCTED PREM ISES AGGREGATING 5555 SQ.FT.. THE CONSTRUCTION AND TRANSFER OF CONSTRUCTED FLATS WAS TO BE UNDERTAKEN BY THE DEVELOPERS. HOWEVER, THERE WAS A CLAUSE IN THE AGREEMENT WHEREBY IF THE DEVELOPER FAILED TO TRANSFER THE CONSTRUCTED FLATS WITHIN THE STIPULATED TI ME LIMIT OF 21 MONTHS, THE DEVELOPER WAS REQUIRED TO PAY RS. 50,00,000/ - TO THE ASSESSEE. THE DEVELOPER FAILED TO CONSTRUCT AND TRANSFER THE FLATS TO THE ASSESSEE AND THEREFORE, AS PER THE CLAUSE OF THE DEVELOPMENT AGREEMENT, IT PAID THE SAID AMOUNT OF RS. 5 0,00,000/ - TO THE ASSESSEE THROUGH THE TRUST. THE AO TOOK THE ENTIRE AMOUNT OF RS. 81 LAKHS I.E. RS. 31 LAKHS RECEIVED IN 2005 AND RS. 50 LAKHS RECEIVED DURING THE YEAR UNDER CONSIDERATION. THE FINDINGS HAVE BEEN RECORDED BY THE AO IN HIS ORDER AT PARAS 5 TO 5.4 . 4 . ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A) . DETAILED SUBMISSIONS WERE FILED BEFORE THE CIT(A) , WHICH ARE INCORPORATED IN THE ORDER OF THE CIT(A) AT PARAS 6 TO 8. RELIANCE WAS PLACED ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF OBEROI HOTEL LTD. VS. CIT, REPORTED IN (1999) 236 ITR 903 (SC) AND IN THE CASE OF RAFIQUE A. MALIK VS. CIT, REPORTED IN (2004) SOT 11 (MUMBAI) . AFTER CONSIDERING THE SUBMISSION AND PERUSING THE MATERIAL ON RECORD, CIT(A) FOUND THAT THE ASSESSEE HAS RECEIVED TOTAL CONSIDERATION OF RS. 81,00,000/ - , WHICH IS CAPITAL IN NATURE. THE PROVISIONS OF SECTION I TA NO. 1430 /1 2 5 2(47) OF THE ACT WERE ALSO TAKEN INTO CONSIDERATION. ACCORDINGLY, THE SALE CONSIDERATION WAS TREATED AS CAPITAL GAIN LIABLE FOR CAPITAL GAIN TAX AND THE AO WAS DIRECTED TO COMPUTE THE CONSIDERATION UNDER THE HEAD CAPITAL GAIN. IN THIS WAY THE APPEAL OF THE ASSESSEE WAS ALLOWED IN PART. 5. LEARNED DR PLACED RELIANCE ON THE ORDER OF AO. 6 . ON THE OTHER HAND, LEARNED COUNSEL OF THE ASSESSEE PLACED RELIANCE ON THE ORDER OF CIT(A) . IT WAS FURTHER SUBMITTED THAT THE ASSESSEE WAS NOT IN BUSINESS OF DEVELOPING OF PROPERTY OR PURCHASE AND SALE OF PROPERTY AS HE IS EARNING SMALL BROKERAGE ON ACCOUNT OF SALE OF CARS ETC.. A CHART SHOWING BROKERAGE I NCOME RIGHT FROM ASSESSMENT YEAR 2004 - 05 WAS ALSO FILED BY THE LEARNED AR. 7 . AFTER CONSIDERING THE SUBMISSION AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT LEARNED CIT(A) WAS RIGHT IN HOLDING THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE IS LIABLE TO CAPITAL GAIN. THE ASSESSEE W AS NOT INDULGED IN THE ACTIVITIES OF SALE AND PURCHASE OF FLATS OR DEVELOPING THE LAND AS THE PARTNERSHIP CONCERN WAS INVOLVED IN BROKERAGE ON ACCOUNT OF SALES AND PURCHASE OF CARS ETC. THE ASSESSEE TOOK FLATS, WHICH WAS SHOWN AS CAPITAL ASSET AND, THEREFO RE, IN OUR CONSIDERED VIEW, WAS LIABLE FOR CAPITAL GAIN ONL Y. DUE TO CERTAIN CIRCUMSTANCES, AS DISCUSSED WHILE RECORDING BRIEF FACTS OF THE CASE, THE FLATS COULD NOT BE ALLOTTED THE ASSESSEE AND AS PER AGREEMENT A TOTAL CONSIDERATION OF RS. 81 LAKHS WAS REC EIVED BY THE ASSESSEE. IN OUR VIEW, THE AMOUNT SO RECEIVED BY THE ASSESSEE IS IN LIEU OF CAPITAL ASSET I TA NO. 1430 /1 2 6 AND, THEREFORE, THE CAPITAL GAIN HAS TO BE ASSESSED AND NOT BUSINESS INCOME. THE FINDINGS OF THE LEARNED CIT(A) RECORDED IN PARA 8 TO 9.2, ARE AS UNDER : - 8. I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIONS OF THE APPELLANT AND ALSO PERUSED THE ORDER OF THE AO. THE AO IN THE ASSESSMENT ORDER HAS NOT GIVEN ANY REFERENCE OF THE ORIGINAL DEAL OF FLATS TO BE PURCHASED BY THE APPELLANT VIDE AGREEMENT DAT ED 27.01.1995 AND 08.02.1995. THE AO HAS NOT BEEN ABLE TO BRING ON RECORD ANY COGENT MATERIAL TO PROVE THAT THE TRANSACTION WAS WITHIN THE AMBIT OF AN ADVENTURE IN THE NATURE OF TRADE. THE AO HAS ALSO FAILED TO PROVE THAT THE IN T ENTION OF THE APPELLANT WAS TO TRADE IN DEVELOPMENT RIGHTS. 8.1 I FIND CONSIDERABLE MERIT IN THE ARGUMENTS OF THE LD. AR OF THE APPELLANT AND HOLD THAT THERE WAS NO CASE OF TREATING THE INCOME AS BUSINESS INCOME. THE APPELLANT HAD PURCHASED FLATS WHICH DUE TO FAILURE ON THE PART OF THE DEVELOPER COULD NOT BE DEVELOPED AND IN LIEU OF THAT THE APPELLANT RECEIVED A TOTAL OF RS. 81,00,000/ - (RS. 31,00,000 + RS. 50,00,000/ - ). THE SUM SO RECEIVED IS A CAPITAL RECEIPT AS THE APPELLANT HAS RELINQUISHED ITS RIGHTS IN THE SAID PLOT VIDE AGREEMEN T DATED 16.12.2004 IN LIEU OF THE SUM RECEIVED OF RS. 81,00,000/ - . SECTION 2(47) OF THE I.T.ACT., 1961 CLEARLY STATES THAT TRANSFER IN RELATION TO A CAPITAL ASSETS INCLUDES : (I) THE SALE, EXCHANGE OF RELINQUISHMENT OF THE ASSET; (II) THE EXTINGUISHMENT OF ANY RIGHTS WHEREIN. THE APPELLANT HAS RELINQUISHED ITS RIGHTS IN THE LAND WHICH IS CLEARLY COVERED BY SUB SECTION (I) SECTION 2(47) AS STATED HEREIN ABOVE. 9.1 IN VIEW OF THE ABOVE DISCUSSION COUPLED WITH THE CASE LAWS RELIED UPON BY THE LD. A.R., I AM OF T HE VIEW THAT THE SAID RECEIPTS SHOULD BE TREATED AS CAPITAL RECEIPTS GIVING RISE TO CAPITAL GAINS AND NOT BUSINESS INCOME AS TREATED BY THE A.O. IN THE ASSESSMENT ORDER. IN THE CASE OF THE APPELLANT BOTH THE CONDITIONS OF TREATING THE INCOME AS CAPITAL G AINS I.E. I) EXISTENCE OF A CAPITAL ASSET AND II) TRANSFER OF THE SAID CAPITAL ASSET ARE SATISFIED. 9.2 HOWEVER, THE APPELLANTS CLAIM OF RS. 9,31,000/ - AS PAID TO FIVE PARTIES TO SETTLE THEIR CLAIMS AND ACCORDINGLY INCREASE ITS COST OF THE FLATS FROM 22,0 0,000/ - TO 31,31,000/ - HAS NOT BEEN SUBSTANTIATED AND THEREFORE, THE COST OF THE FLATS HAS TO BE TAKEN AT RS. 22,00,000/ - ONLY. THE A.O. IS DIRECTED TO TREAT THE INCOME OF THE APPELLANT AS CAPITAL GAINS AND GIVEN THE INDEXATION ON THE COST OF RS. 22,00,000 / - ONLY AND COMPUTE THE CAPITAL GAINS OF THE APPELLANT BY TAKING THE SALE CONSIDERATION AT RS. 81,00,000/ - . HENCE, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 8 . T HE ABOVE FINDINGS OF THE LEARNED CIT(A) REMAINED UNCONTROVERTED. THEREFORE, WE SEE NO REASON T O INTERFERE IN THE FINDINGS I TA NO. 1430 /1 2 7 OF THE LEARNED CIT(A) . ACCORDINGLY, WE CONFIRM THE ORDER OF THE LEARNED CIT(A) . 9 . RESULTANTLY , APPEAL OF THE DEPARTMENT IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11TH D AY OF SEPT . 201 3 . SD/ - ( ) ( R AJENDRA SINGH ) SD/ - ( ) ( R.K.GUPTA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED : 11 / 09 / 2013 /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE C I T(A) , MUMBAI . 4. / C I T 5. / DR, ITAT, MUMBAI . 6. GUARD FILE. //TRUE COPY// / BY ORDER, ( /ASSTT. REGISTRAR) / ITAT, MUMBAI