Indus Valley Housing, CHENNAI V. DCIT, CHENNAI

ITA 230/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9081 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 08-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Business income
• Section: 263

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NOS.230 & 231/MDS/2016 ( )( / ASSESSMENT YEARS : 2009-10 & 2011-12 M/S INDUS VALLEY HOUSING, A-68, ANNA NAGAR EAST, CHENNAI - 600 102. PAN : AACFI 2508 P V. THE DEPUTY COMMISSIONER OF INCOME TAX, BUSINESS CIRCLE XIII, CHENNAI - 600 034. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SH. T. BANUSEKAR, CA -.+, / 0 / RESPONDENT BY : SH. PATHLAVATH PEERYA, CIT 1 / 2% / DATE OF HEARING : 13.04.2016 3') / 2% / DATE OF PRONOUNCEMENT : 17.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: BOTH THE APPEALS OF THE ASSESSEE ARE DIRECTED AG AINST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-7, CHENNAI, DATED 30.11.2015 AND PERTAIN TO ASSESSMENT YEARS 2009- 10 AND 2011-12. SINCE COMMON ISSUE ARISES FOR CON SIDERATION IN BOTH THE APPEALS, WE HEARD BOTH THE APPEALS TOGETHE R AND DISPOSING OF THE SAME BY THIS COMMON ORDER. 2 I.T.A. NOS.230 & 231/MDS/16 2. SH. T. BANUSEKAR, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE ENTERED INTO AN AGREEME NT FOR DEVELOPMENT OF LAND WITH M/S DELUX APARTMENTS & BUI LDING COMPANY. AS PER THIS AGREEMENT, THE ASSESSEE IS E NTITLED TO RETAIN 45% OF UNDIVIDED SHARE OF THE LAND AND 55% OF UNDIV IDED SHARE IN THE LAND WOULD GO TO M/S DELUXE APARTMENTS & BUILDI NG COMPANY. THE ASSESSEE, ACCORDING TO THE LD. REPRESENTATIVE, HAS NOT DONE ANYTHING OTHER THAN PROVIDING THE LAND FOR DEVELOPM ENT. THE ENTIRE BUSINESS ACTIVITY WAS DONE BY M/S DELUXE APARTMENTS & BUILDING COMPANY. AFTER COMPLETION OF THE PROJECT, M/S DELU XE APARTMENTS & BUILDING COMPANY HANDED OVER SEVEN FLATS TO THE A SSESSEE-FIRM, WHICH WAS SHOWN AS FIXED ASSETS IN THE FINANCIALS. HOWEVER, THE ASSESSING OFFICER FOUND THAT THE BUSINESS OF THE PA RTNERSHIP FIRM WAS PURCHASING AND SELLING OF THE LAND, THEREFORE, THE ACTIVITIES OF THE ASSESSEE HAVE TO BE CONSIDERED AS BUSINESS ACTI VITY AND PROFIT ON SALE OF LAND HAS TO BE ASSESSED AS BUSINESS INCO ME BY THE ASSESSING OFFICER. THE ASSESSEE RETURNED THE PROFI T ON SALE OF LAND AS CAPITAL GAIN SINCE THE LAND WAS TRANSFERRED TO M /S DELUX APARTMENTS & BUILDING COMPANY. 3 I.T.A. NOS.230 & 231/MDS/16 3. THE LD. REPRESENTATIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT THE SUBJECT LAND WAS SITUATED AT NOLAMBUR IN T HE SUBURBAN AREA OF CHENNAI. IN FACT, THE LAND WAS PURCHASED BY M/S PETRO PLAST INDUSTRIES IN FEBRUARY AND MARCH, 2005. THE PARTNE RSHIP OF THE ASSESSEE-FIRM WAS FORMED IN APRIL, 2005. THEREFORE , WHEN THE LAND WAS PURCHASED, THE FIRM ITSELF WAS NOT IN EXISTENCE . THEREFORE, THE INTENTION OF THE INDIVIDUAL PARTNERS, AT THE TIME O F PURCHASE OF PROPERTY, IS ONLY TO TREAT THE LAND AS CAPITAL ASSE T AND NOT AS TRADING ASSET. THE PARTNERSHIP FIRM, WHICH CAME INTO EXIST ENCE SUBSEQUENT TO PURCHASE OF LAND, HAS TREATED THE LAND AS CAPITA L ASSET IN THEIR BOOKS OF ACCOUNT. AFTER THE FORMATION OF PARTNERSH IP FIRM, THE DOCUMENT WAS REGISTERED IN THE NAME OF THE ASSESSEE -FIRM ON 23.05.2005. SINCE THE LAND WAS TREATED AS CAPITAL ASSET, IN ORDER TO GENERATE FUNDS TO THE ASSESSEE-FIRM, THEY INTENDED TO SELL THE LAND FOR A PROFIT. ACCORDINGLY, IN ORDER TO EARN MORE P ROFIT ON SALE OF LAND, A MEMORANDUM OF UNDERSTANDING WAS ENTERED FOR DEVEL OPMENT OF LAND WITH M/S DELUXE APARTMENTS & BUILDING COMPANY. THE SALE CONSIDERATION IN THE FORM OF 88,200 SQ.FT. OF CONST RUCTED AREA, WHICH IS EQUAL TO 45% OF CONSTRUCTED AREA, WAS GIVEN TO T HE ASSESSEE- FIRM. WHAT WAS RECEIVED BY THE ASSESSEE-FIRM WAS TREATED AS CAPITAL ASSET. THEREFORE, THE ASSESSEE RETURNED TH E PROFIT ON SALE OF 4 I.T.A. NOS.230 & 231/MDS/16 THE PROPERTY AS CAPITAL GAIN. HOWEVER, THE ASSESSI NG OFFICER HAS TREATED THE SAME AS BUSINESS INCOME OF THE ASSESSEE . 4. REFERRING TO THE ORDER OF THE CIT(APPEALS), THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE LAND IN QUESTION WAS PURCHASED AS INVESTMENT AND THE SAME WAS SHOWN UNDER THE HEAD FIXED ASSET IN THE BOOKS AND NOT UNDER CURR ENT ASSET. THE CIT(APPEALS) IGNORED THAT THE INTENTION OF THE ASSE SSEE IS NOT TO TREAT THE ASSETS AS STOCK-IN-TRADE. ACCORDING TO T HE LD. REPRESENTATIVE, THE ASSESSEE HAS NOT CONSTRUCTED AN Y FLAT OVER THE LAND. THE ASSESSEE HAS SIMPLY HANDED OVER THE LAND TO M/S DELUXE APARTMENTS & BUILDING COMPANY FOR CONSTRUCTION AND REALIZED THE PROFIT IN THE FORM OF 45% OF CONSTRUCTED AREA. ACC ORDING TO THE LD. REPRESENTATIVE, THE ORIGINAL INTENTION OF THE ASSES SEE WAS TO KEEP THE LAND AS INVESTMENT AND NOT AS TRADER. REFERRIN G TO THE ORDER OF THE CIT(APPEALS), THE LD. REPRESENTATIVE SUBMITTED THAT IT IS NOT CORRECT TO SAY THAT THE DOMINANT INTENTION OF THE A SSESSEE WAS TO COMMERCIALLY EXPLOIT THE LAND FOR HOUSING PROJECT. IN FACT, THE PAYMENT FOR PURCHASE OF LAND WAS MADE IN THE MONTH OF FEBRUARY AND MARCH, 2005, BEFORE THE PARTNERSHIP FIRM CAME I NTO EXISTENCE. THEREFORE, THE INTENTION OF THE ASSESSEE-FIRM CANNO T BE ASCERTAINED 5 I.T.A. NOS.230 & 231/MDS/16 AT THE TIME OF PURCHASE OF PROPERTY. THE INTENTION IN THE MONTH OF FEBRUARY AND MARCH, 2005 WAS TO KEEP THE SAME AS IN VESTMENT AND NOT AS STOCK-IN-TRADE. MERELY BECAUSE THE LAND WAS DEVELOPED THROUGH A DEVELOPER, NAMELY, M/S DELUXE APARTMENTS & BUILDING COMPANY, IT CANNOT BE SAID THAT THE INTENTION WAS T O TREAT THE LAND AS STOCK-IN-TRADE. THE CIT(APPEALS) WITHOUT TAKING INTO CONSIDERATION OF THE FACTUAL ASPECT, CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 5. REFERRING TO THE ORDER OF THE ADMINISTRATIVE COM MISSIONER IN THE CASE OF ONE OF THE PARTNERS MRS. SAROJ AGARWAL, WHO IS THE OWNER OF ADJACENT LAND WHICH WAS ALSO DEVELOPED BY THE VERY SAME BUILDER ALONG WITH THE ASSESSEES LAND, THE LD. REP RESENTATIVE SUBMITTED THAT THE ADMINISTRATIVE COMMISSIONER HAS DIRECTED THE ASSESSING OFFICER TO TREAT THE GAIN ON SALE OF THE LAND AS CAPITAL GAIN. IN FACT, MRS. SAROJ AGARWAL CLAIMED THE PROF IT AS BUSINESS INCOME. HOWEVER, THE ADMINISTRATIVE COMMISSIONER D IRECTED THE ASSESSING OFFICER TO TREAT THE SAME AS CAPITAL GAIN AND NOT AS INCOME FROM BUSINESS. THIS ORDER OF THE ADMINISTRA TIVE COMMISSIONER ATTAINED FINALITY. ACCORDING TO THE L D. REPRESENTATIVE, WHEN THE PART OF THE LAND IN THE VERY SAME PROJECT WAS TREATED AS 6 I.T.A. NOS.230 & 231/MDS/16 CAPITAL ASSET, THE BALANCE LAND CANNOT BE TREATED A S STOCK-IN-TRADE. A COPY OF THE ORDER OF THE ADMINISTRATIVE COMMISSIO NER IN THE CASE OF MRS. SAROJ AGARWAL IS AVAILABLE AT PAGE 3 OF THE PAPER-BOOK. 6. ON THE CONTRARY, SH. PATHLAVATH PEERYA, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASS ESSEE- PARTNERSHIP FIRM WAS FORMED BY A PARTNERSHIP DEED D ATED 05.04.2005 THE PAYMENT FOR PURCHASE OF LAND AT NOLA MBUR WAS PAID BY M/S PETRO PLAST INDUSTRIES LTD. IN THE MONTH OF FEBRUARY-MARCH, 2005. THE PROPERTY WAS REGISTERED IN THE NAME OF A SSESSEE- PARTNERSHIP FIRM ON 23.05.2005. THE ASSESSEE ENTER ED INTO A MEMORANDUM OF UNDERSTANDING WITH M/S DELUXE APARTME NTS & BUILDING COMPANY ON 12.04.2006 FOR DEVELOPMENT OF L AND. ACCORDING TO THE LD. D.R., THE BUILDER CONSOLIDATED THE LAND HOLDINGS OF THE OTHER FOUR INDIVIDUAL MEMBERS OF AGARWAL FAM ILY FOR THE PURPOSE OF JOINT DEVELOPMENT. THEREFORE, THE ACTIO N OF THE ASSESSEE-PARTNERSHIP FIRM WAS PRE-MEDITATED AND THE INTENTION OF THE ASSESSEE WAS TO DO BUSINESS IN REAL ESTATE. TH EREFORE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER HA S RIGHTLY CLASSIFIED THE PROFIT ON SALE OF LAND AS INCOME FRO M BUSINESS. THE MANNER IN WHICH THE LAND WAS PURCHASED AND STEPS TA KEN TO 7 I.T.A. NOS.230 & 231/MDS/16 DEVELOP THE LAND IN A SHORT SPAN OF TIME FROM THE D ATE OF PURCHASE CLEARLY INDICATES THAT THE INTENTION OF THE ASSESSE E WAS TO KEEP THE LAND AS STOCK-IN-TRADE, THEREFORE, THE CIT(APPEALS) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE QUESTION ARISES CONSIDERATION IS WHETHER THE INVESTMENT MADE BY THE ASSESSEE IN THE LAND AT NOLAMBUR IS A STOCK-IN-TRAD E OR CAPITAL ASSET? IF THE LAND IS STOCK-IN-TRADE, THEN NATURAL LY THE PROFIT ON SALE HAS TO BE CONSIDERED AS INCOME FROM BUSINESS. IF I T IS CONSIDERED AS CAPITAL ASSET, THEN THE PROFIT HAS TO BE TREATED AS CAPITAL GAIN. TO ASCERTAIN WHETHER THE LAND IN QUESTION IS CAPITAL A SSET OR STOCK-IN- TRADE, THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE PROPERTY HAS TO BE ASCERTAINED. IT IS NOT IN DISPU TE THAT THE ASSESSEE-PARTNERSHIP FIRM WAS FORMED ON 05.04.2005 BY MEANS OF PARTNERSHIP DEED. HOWEVER, THE PAYMENT FOR PURCHAS E OF LAND AT NOLAMBUR WAS MADE BY M/S PETRO PLAST INDUSTRIES LTD . IN FEBRUARY- MARCH, 2005. THEREFORE, IT IS OBVIOUS THAT BEFORE FORMATION OF PARTNERSHIP FIRM, THE PARTNERS, NAMELY, THE MEMBERS OF THE AGARWAL FAMILY DECIDED TO PURCHASE THE PROPERTY BY MAKING P AYMENT. 8 I.T.A. NOS.230 & 231/MDS/16 THEREFORE, THE INTENTION OF THE PARTNERS OF THE FIR M HAS TO BE ASCERTAINED AS TO WHETHER THEY INTENDED TO TRADE IN REAL ESTATE OR THEY INTENDED TO KEEP THE LAND AS INVESTMENT. EVEN THOUGH THE ENTRIES IN THE BOOKS OF ACCOUNT WOULD NOT DETERMINE THE NATURE OF THE LAND HELD BY THE ASSESSEE, HOWEVER, THE ENTRIES IN THE BOOKS ARE CIRCUMSTANTIAL FACTORS TO BE TAKEN INTO CONSIDERATI ON FOR THE PURPOSE OF ASCERTAINING THE INTENTION OF THE PARTIES. THE FACT THAT THE PAYMENT WAS MADE BEFORE THE FORMATION OF PARTNERSHI P FIRM AND THE PARTNERSHIP FIRM WAS FORMED ONLY ON 05.04.2005, CON SEQUENTLY THE LAND WAS REGISTERED ON 23.05.2005 IN THE NAME OF TH E ASSESSEE-FIRM AND THE LAND WAS TREATED AS FIXED ASSET IN THE BOOK S OF THE FIRM, WOULD INDICATE THAT AT THE TIME OF PURCHASE OF THE PROPERTY, THE INTENTION OF THE PARTNERS WAS TO TREAT THE SAME AS CAPITAL ASSET. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ENTIRE CIRCUMSTANCES AND THE MATERIAL FACTS NEED TO BE TAK EN INTO CONSIDERATION TO ASCERTAIN THE INTENTION OF THE PAR TNERS AT THE TIME OF PURCHASE OF THE PROPERTY. AFTER CONSIDERING ALL TH E FACTS AVAILABLE ON RECORD, INCLUDING THE PAYMENT MADE BEFORE THE DATE OF FORMATION OF PARTNERSHIP FIRM, THIS TRIBUNAL IS OF THE CONSIDERE D OPINION THAT THE LAND IN QUESTION WAS INTENDED TO BE TREATED AS CAPI TAL ASSET BY THE PARTNERSHIP FIRM. 9 I.T.A. NOS.230 & 231/MDS/16 8. THE NEXT QUESTION ARISES FOR CONSIDERATION IS WH EN THE PARTNERSHIP FIRM ITSELF WAS FORMED FOR PURCHASE AND SALE OF LAND, CAN THE SUBJECT LAND BE HELD AS CAPITAL ASSET? THIS TR IBUNAL IS OF THE CONSIDERED OPINION THAT A COMPANY / PARTNERSHIP FIR M CAN HAVE TWO PORTFOLIOS, ONE IS STOCK-IN-TRADE AND ANOTHER IS IN VESTMENT. EVEN A PARTNERSHIP FIRM, WHICH IS ENGAGED IN PURCHASE AND SELLING OF LAND, CAN RETAIN PART OF LAND AS STOCK-IN-TRADE AND PART OF LAND AS INVESTMENT. WHEN THE INTENTION OF THE ASSESSEE IS TO TREAT THE LAND AS INVESTMENT, MERELY BECAUSE THE SAME WAS USED FOR DEVELOPMENT BY ENTERING INTO A MEMORANDUM OF UNDERSTANDING WITH IN A SHORT SPAN OF TIME, THAT CANNOT BE A REASON TO TREAT THE SUBJECT LAND AS STOCK-IN-TRADE. THE ASSESSEE IN ORDER TO GENERATE FUNDS FOR BUSINESS MIGHT HAVE ENTERED INTO MEMORANDUM OF UNDE RSTANDING WITH ANOTHER TRADER WHO IS DEALING IN REAL ESTATE. IF THE INTENTION OF THE ASSESSEE IS TO DEAL IN REAL ESTATE, THE ASSESSE E WOULD HAVE DEVELOPED THE LAND BY ITSELF. IN THE CASE BEFORE U S, THE ASSESSEE HAS NOT DEALT WITH THE LAND BY ITSELF. THE LAND WA S IN FACT HANDED OVER TO OTHER TRADER IN REAL ESTATE FOR DEVELOPMENT . THE MATTER WOULD BE ENTIRELY DIFFERENT IF THE ASSESSEE CONSTRU CTED THE MULTISTORY BUILDING AND DEVELOPED THE LAND. SINCE THE LAND WA S SIMPLY HANDED 10 I.T.A. NOS.230 & 231/MDS/16 OVER TO OTHER TRADER FOR DEVELOPMENT, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE LAND IN QUESTION HAS TO BE TREATED AS CAPITAL ASSET. 9. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE ADMINISTRATIVE COMMISSIONER, A COPY OF WHICH IS AVA ILABLE AT PAGE 3 OF THE PAPER-BOOK. MRS. SAROJ AGARWAL, ONE OF THE CO-OWNERS OF THE LAND IN WHICH THE PROJECT WAS DEVELOPED BY M/S DELU XE APARTMENTS & BUILDING COMPANY, TREATED THE TRANSACTION AS BUSI NESS TRANSACTION AND CLAIMED THE PROFIT AS BUSINESS INCO ME. THE ADMINISTRATIVE COMMISSIONER BY EXERCISING HIS POWER UNDER SECTION 263 OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT' ) FOUND THAT THE ASSESSEE NEVER ENGAGED IN THE BUSINESS AND THE LAND WAS SOLD WITHOUT EVEN IMPROVEMENT. NO SUPPLEMENTARY WORK WA S MADE BY THE ASSESSEE OTHER THAN ENTERING INTO MEMORANDUM OF UNDERSTANDING FOR DEVELOPMENT WITH SOME BUILDER TO WHICH THE PRESENT HAS ENTERED INTO. THE ADMINISTRATIVE COMMI SSIONER IN THE CASE OF MRS. SAROJ AGARWAL FOUND THAT PART OF THE L AND WAS CAPITAL ASSET. ACCORDINGLY, HE DIRECTED THE ASSESSING OFFI CER TO TREAT THE GAIN AS CAPITAL GAIN. THIS ORDER OF THE ADMINISTRA TIVE COMMISSIONER, PASSED UNDER SECTION 263 OF THE ACT ATTAINED FINALI TY. IN THIS CASE 11 I.T.A. NOS.230 & 231/MDS/16 ALSO, EVEN THOUGH THE PARTNERSHIP FIRM WAS FORMED 0 5.04.2005 AND THE LAND WAS REGISTERED IN THE NAME OF THE FIRM ON 23.05.2005, THE ASSESSEE HAS NOT COMMENCED ANY BUSINESS ACTIVITIES; NO OTHER LAND APPEARS TO HAVE BEEN PURCHASED; NO SUPPLEMENTARY WO RK WAS CARRIED ON BY THE ASSESSEE-FIRM IN THE SUBJECT LAND ; NO ORGANIZED EFFORT WAS MADE OTHER THAN SIMPLY ENTERING INTO MEM ORANDUM OF UNDERSTANDING WITH THE BUILDER. AS ALL RISKS AND R IGHTS RELATING TO CONSTRUCTION OF BUILDING WERE VESTED WITH THE BUILD ER AND THE ASSESSEE HAS NOT TAKEN ANY RISK IN THE CONSTRUCTION AND DEVELOPMENT OF FLATS, THIS TRIBUNAL IS OF THE CONSI DERED OPINION THAT THE PROFIT ON SALE OF THE LAND IN THE HANDS OF THE ASSESSEE-FIRM CANNOT BE TREATED DIFFERENTLY THAN AS IT WAS TREATE D IN THE CASE OF MRS. SAROJ AGARWAL. 10. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT THE PROFIT ON SALE OF LAND HAS TO BE N ECESSARILY ASSESSED AS CAPITAL GAIN AND NOT AS BUSINESS INCOME . ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE A ND THE ASSESSING OFFICER IS DIRECTED TO TREAT THE PROFIT ON SALE OF LAND AS CAPITAL GAIN. 11. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE STAND ALLOWED. 12 I.T.A. NOS.230 & 231/MDS/16 ORDER PRONOUNCED ON 17 TH JUNE, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 17 TH JUNE, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 92 () /CIT(A)-7, CHENNAI 4. PRINCIPAL CIT-2, CHENNAI 5. 7: -2 /DR 6. ;( < /GF.