ADDL CIT RG 22(2), NAVI MUMBAI V. JAI TRIKANAND RAO, MUMBAI

ITA 3873/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3569 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 26-02-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 12-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Business income; Principle of natural justice; Cost of acquisition
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO. 3873 /MUM/2011 ASSESSMENT YEAR: 2007-08 THE DY. C.I.T. 22(2), 4 TH FLOOR, TOWER NO. 6, VASHI RLY. STN. BLDG. COMPLEX, VASHI, NAVI MUMBAI. VS. SHRI JAI TRIKANAND RAO, 10 TH FLOOR, JAI SAI, 359, CENTRAL AVENUE, CHEMBUR, MUMBAI-400 071. PAN: ACLPR8510R (APPELLANT) (RESPONDENT) AND C.O. NO. 24 /MUM/2012 (ARISING OUT OF ITA NO.3873/MUM/2011 FOR ASSESSMEN T YEAR: 2007-08) SHRI JAI TRIKANAND RAO, 10 TH FLOOR, JAI SAI, 359, CENTRAL AVENUE, CHEMBUR, MUMBAI-400 071. PAN: ACLPR8510R VS. THE DY. C.I.T. 22(2), 4 TH FLOOR, TOWER NO. 6, VASHI RLY. STN. BLDG. COMPLEX, VASHI, NAVI MUMBAI. (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : MR. CHATURBHUJ DAS CHATNANI ASSESSEE BY : MR.VIJAY MEHTA & MR. GOVIND JAVERI DATE OF HEARING : 03.06.2013 DATE OF PRONOUNCEMENT : 21.06.2013 O R D E R PER SANJAY GARG, JM: THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJE CTIONS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 15.02 .2011 OF THE CIT(A) RELEVANT TO A.Y. 2007-08. 1. THE RELEVANT GROUNDS OF THE APPEAL OF THE REVENU E READ AS UNDER:- ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 2 (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN TREATING THE GAIN ARISING OUT SALE OF TWO FLATS AS CAPITAL GAINS INSTEAD OF BUSINESS INCOME AS CORRECTLY ASSES SED BY THE A.O. WITHOUT APPRECIATING THE FACT THAT THERE WAS NEITHE R TRANSFER OF LAND TO THE DEVELOPER NOR ANY AMOUNT WAS PAID TO THE ASSESS EE BY THE DEVELOPER. (2) WITHOUT PREJUDICE TO THE ABOVE, WHETHER THE LD. CIT(A) WAS JUSTIFIED IN ALLOWING THE BENEFIT OF INDEXATION TO THE COST OF LAND WHILE ARRIVING AT SHORT TERM CAPITAL GAINS ON THE ASSET, SOLD WITHOUT APPRECIATING THE FACT THAT LAND IS APPURTENANT TO T HE BUILDING. 2. THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE R EPRODUCED AS UNDER:- 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN NOT HOLDING THAT THE ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 WAS ILLEGAL AND BAD IN LAW. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN NOT VACATING THE ORDER OF THE ASSESSING OFFICER AS IT WAS PASSED WITHOUT COMPLYING WITH THE PRINCIPLES OF NATURAL JUSTICE. 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE CAPITAL GAINS ARISING ON SALE OF FLATS WILL BE SHORT TERM CAPITAL GAINS. THE LEARNED CIT(A) HAS ERRED IN GIVING THIS FINDING WHICH IS IN SHARP CONTRADICTION WITH HER OWN ACTION OF GRANT ING INDEXATION ON COST OF LONG TERM ASSET I.E. LAND PART. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT HOLDING THAT THE CAPITAL GAINS EARNED BY THE APPELLANT SHOU LD BE TAXED AS LONG TERM CAPITAL GAINS QUA TRANSFER OF LAND AND TH AT THE CAPITAL GAINS EARNED BY THE APPELLANT QUA TRANSFER OF FLATS SHOULD BE TAXED AS SHORT TERM CAPITAL GAINS. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, A N INDIVIDUAL, INHERITED 50% OF THE PROPERTY SITUATED AT CHAMBUR FROM HIS MOTHER AN D THE 50% OF THE SAME THROUGH GIFT DEED FROM HIS SISTER. SINCE THE BUILDING ON TH E SAID LAND HAD BECOME OLD AND DILAPIDATED, ASSESSEE WANTED TO CONSTRUCT ON THE SA ID LAND A MULTI STORIED BUILDING BY UTILIZING ENTIRE FSI AND PERMISSIBLE TDR AS PER TH E RULES, BY DEMOLISHING/REMOVING THE OLD STRUCTURE. THE ASSESSEE ENTERED INTO A DEVE LOPMENT AGREEMENT, VIDE WHICH, THE DEVELOPER HAD TO BEAR THE COST OF DEMOLISHING T HE OLD STRUCTURE AND CONSTRUCTING THE BUILDING WITHOUT CHARGING ANY AMOUNT FROM THE A SSESSEE AND IN LIEU THEREOF, THE DEVELOPER WOULD GET RIGHT TO SELL THE 50% OF THE CO NSTRUCTED AREA/FLATS IN THE SAID BUILDING. THE TDR RIGHTS OF THE ASSESSEE WERE TO BE LOADED ON THE SAME PLOT OF LAND AS PER AGREEMENT. AS PER THE AGREEMENT, THE DEVELOP ER HAD DEPOSITED AN INTEREST ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 3 FREE SECURITY AMOUNT OF RS. 1,00,00,000/- WITH THE ASSESSEE. ON COMPLETION OF THE BUILDING, THE SAME WAS TO BE REFUNDED BY THE ASSESS EE TO THE DEVELOPER. THE CONSTRUCTION WAS ACCORDINGLY MADE. THE TOTAL CONST RUCTED AREA, THUS, CAME OUT TO BE 2166.2 SQ. MT., OUT OF WHICH THE ASSESSEE GOT HI S SHARE OF CONSTRUCTED AREA TO THE EXTENT OF 1082.7 SQ. MT. IN THE FORM OF FLATS. OUT OF HIS SHARE OF CONSTRUCTED AREA, THE ASSESSEE SOLD TWO FLATS FOR RS. 1,20,00,0 00/- TO REFUND THE SECURITY DEPOSITS OUT OF THE REALIZED AMOUNT. THE ASSESSEE, TOOK THE COST OF ACQUISITION OF PROPERTY AS PER ITS VALUE AS ON 01.04.1981 AT RS. 21,50,000/- AND THEREBY PROPORTIONATELY DEDUCTING THE INDEXED COST, COMPUTE D THE INCOME FROM THE SALE OF FLATS AT RS. 1,02,57,210/- UNDER THE HEAD LONG TER M CAPITAL GAINS. THE A.O., HOWEVER, TREATED THE SAME AS BUSINESS INCOME OF T HE ASSESSEE OBSERVING THAT THE DEVELOPER HAD NOT PAID ANY AMOUNT TO THE ASSESSEE F OR THE LAND OR FSI LOADED ON THE SAID LAND. SINCE THE WHOLE OF THE CONSTRUCTED A REA OR PREMISES PERTAINING TO THE ASSESSEE WAS CONSTRUCTED FROM THE FSI OWNED BY THE ASSESSEE, HENCE THERE WAS NO QUESTION OF TRANSFER OF FSI OR THE LAND, TO THE DEV ELOPER. THE A.O. FURTHER OBSERVED THAT ALL THE PREMISES PERTAINING TO THE ASSESSEE HA D BECOME PROPERTY OF THE ASSESSEE, CONSTRUCTED BY HIM THROUGH THE DEVELOPER. HE FURTHER OBSERVED THAT THE ASSESSEE GOT THIS PREMISES, HAVING COST PRICE OF RS . 800 PER SQ. FT., WITHOUT PAYING ANY MONEY TO THE BUILDER AND AS SUCH THERE WAS NO T RANSFER OF LAND OR FSI, THUS IT WAS A BUSINESS ACTIVITY OF THE ASSESSEE. 4. IN APPEAL, THE LEARNED CIT(A) HELD THAT THE INCO ME ARRIVED BY THE SALE OF FLATS WAS CAPITAL GAINS OBSERVING THAT THE ASSESSEE HAD MADE IMPROVEMENTS BY WAY OF DEMOLISHING THE OLD STRUCTURE AND CONSTRUCTING A MU LTI-STORIED BUILDING. HE FURTHER OBSERVED THAT THE COST OF CONSTRUCTION IN THE HANDS OF THE ASSESSEE WAS THE AMOUNT FOR WHICH HE HAD TRANSFERRED THE TDR RIGHTS TO THE DEVELOPER AT RS. 1,11,92,147/-. HE FURTHER OBSERVED THAT HAVING INCURRED THIS AMOUN T, WHEN THE ASSESSEE SOLD THE FLATS, THE INCOME FROM THE SAME WAS CAPITAL GAINS AND WAS NOT A BUSINESS INCOME. THE LEARNED CIT(A) FURTHER ALLOWED THE BENEFIT OF I NDEXATION AT THE COST OF ACQUISITION PROPORTIONATELY OF LAND. HOWEVER, HE O BSERVED THAT THE FLATS WERE NOT RETAINED BY THE ASSESSEE FOR THREE YEARS, THUS HE T REATED THE INCOME THEREOF AS SHORT TERM CAPITAL GAINS. WITH THIS BACKGROUND, T HE REVENUE HAS COME WITH TWO ALTERNATE GROUNDS OF APPEAL, AS REPRODUCED ABOVE, I .E. EITHER THE INCOME FROM THE ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 4 SALE OF TWO FLATS IS REQUIRED TO BE TREATED AS BUS INESS INCOME OR IF THE SAME IS TO BE TREATED AS SHORT TERM CAPITAL GAINS, NO BENEFI T OF INDEXATION TO THE COST OF LAND IS LIABLE TO BE GIVEN TO THE ASSESSEE. 5. ON THE OTHER HAND, THE CONTENTION OF THE ASSESSE E IN HIS CROSS OBJECTIONS IS THAT THE INCOME ARRIVED FROM THE SALE OF FLATS SHOU LD BE BIFURCATED UNDER TWO HEADS, I.E. INCOME EARNED BY THE ASSESSEE QUA TRANSFER OF LAND BE TREATED AS LONG TERM CAPITAL GAINS AND THE INCOME EARNED QUA TRANSFER O F FLATS SHOULD BE TAXED AS SHORT TERM CAPITAL GAINS. 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES. 7. TO STRESS HIS POINT THAT INCOME EARNED FROM THE SALE OF LAND WAS NOT ADVENTURE IN THE NATURE OF TRADE RATHER WAS CAPITAL GAINS, THE LEARNED A.R. HAS RELIED UPON THE FOLLOWING AUTHORITIES:- I. ACIT V SHRI JAIMAL K. SHAH [137 ITD 376 (MUM)] II. SMT. VASAVI PRATAP CHAND V DCIT [89 ITD 73 (DEL )] III. THE STATESMAN LTD. V ACIT [295 ITR (AT) 388 (K OL)] IV. MANVANY BROS. V DCIT [112 ITD 68 (PANAJI)] V. CIT V HINDUSTAN HOTELS LTD. [335 ITR 60 (BOM)] 8. THE LEARNED A.R. HAS FURTHER SUBMITTED THAT WH ILE COMPUTING THE CAPITAL GAINS ON THE SALE OF FLATS, THE COST OF LAND AND CO ST OF CONSTRUCTION SHOULD BE SEGREGATED. HE FURTHER SUBMITTED THAT THERE WAS NO INTENTION OF THE ASSESSEE, AT THE TIME OF CONSTRUCTION OF FLATS, TO RE-SELL THE SAME TO EARN BUSINESS PROFIT. EXCEPT THE ABOVE TWO SAID FLATS, WHICH WERE SOLD BY THE ASSESS EE FOR REPAYING THE DEPOSIT TO THE DEVELOPER, NO FURTHER SALE HAS BEEN MADE BY THE ASS ESSEE. THE ASSESSEE BEING A RETIRED PERSON INTENDED TO HAVE A GOOD HOUSE FOR HI S FAMILY PLUS CERTAIN RENTAL INCOME FOR THE DAY-TO-DAY LIVING OF THE FAMILY. 9. THE LEARNED D.R. COULD NOT SATISFY US ON THE POI NT THAT THE INCOME EARNED BY THE ASSESSEE WAS A BUSINESS INCOME. IT IS AN ADMITT ED FACT THAT THE ASSESSEE HAS NOT SOLD ANY PART OF THE PROPERTY TILL DATE, EXCEPT THE ABOVE SAID TWO FLATS. THE ASSESSEE HAS RENTED OUT HIS SHARE OF THE PROPERTY TO HAVE CO NSTANT RENTAL INCOME. IN VIEW OF LAW LAID DOWN IN THE AUTHORITIES RELIED UPON BY THE ASSESSEE AND ALSO IN VIEW OF THE PECULIAR FACTS OF THIS CASE, WE HAVE NO DOUBT THAT THE INCOME EARNED BY THE ASSESSEE WAS CAPITAL GAINS AND NOT INCOME FROM BUSI NESS OR TRADE. ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 5 SO FAR THE QUESTION AS TO WHETHER THE INCOME IS REQ UIRED TO BE COMPUTED UNDER THE HEAD SHORT TERM CAPITAL GAINS OR LONG TERM CAPIT AL GAINS AND WHETHER THE BENEFIT OF INDEXATION TO THE COST OF ACQUISITION OF LAND IS ALLOWABLE TO THE ASSESSEE AND WHETHER THE INCOME IS REQUIRED TO BE SEGREGATE D INTO TWO PARTS I.E. INCOME FROM TRANSFER OF LAND AND INCOME FROM TRANSFER OF B UILDING SEPARATELY, IS CONCERNED, WE MAY OBSERVE THAT NOW IT IS ALMOST A SETTLED PRIN CIPLE OF LAW THAT IN CASE OF SALE OF LAND AND BUILDING, THE GAINS ATTRIBUTABLE TO SAL E OF LAND ARE ASSESSABLE AS LONG TERM CAPITAL OR SHORT TERM CAPITAL GAINS ACCORDING TO THE PERIOD OF HOLDING OF EACH. RELIANCE CAN BE PLACED ON THE LAW LAID DOWN IN COMMISSIONER OF INCOME TAX V. HINDUSTAN HOTELS LTD. AND ANOTHER REPORTED IN [2011] 335 ITR 60 (BOM.) AND COMMISSIONER OF INCOME TAX V. CITI BANK N.A. REPORTED IN (2003) 184 CTR (BOM) 228. 10. IT MAY BE OBSERVED THAT THE BUILDER, IN LIEU OF DEVELOPMENT OF PROPERTY, HAS RETAINED 50% OF THE CONSTRUCTED AREA, WHICH OF COUR SE, HAS BEEN CONSTRUCTED ON THE PLOT OF LAND WHICH HAS BEEN OWNED BY THE ASSESSEE. THE ASSESSEE HAS THUS PARTED WITH HIS RIGHTS TO THE EXTENT OF 50% IN THE SAID LA ND. THE LAND WAS APPURTENANT TO THE BUILDING. THE BUILDING COULD NOT HAVE BEEN CONS TRUCTED IN AIR SEPARATELY WITHOUT ITS BASE ON THE LAND AND THE LAND UNDER THE BUILDIN G CANNOT BE USED SEPARATELY. ALL THAT MEANS THAT WHEN BUILDING HAS BEEN CONSTRUCTED ON THE LAND AND 50% AREA OF THE BUILDING HAS BEEN TRANSFERRED BY THE ASSESSEE T O THE DEVELOPER IN LIEU OF CONSIDERATION FOR CONSTRUCTION THAT ITSELF MEANS TH AT THE ASSESSEE HAS PARTED WITH HIS RIGHTS IN THE LAND TO THE EXTENT OF 50%. UNDER SUCH CIRCUMSTANCES, THE COST OF CONSTRUCTION OF THE AREA WHICH FELL INTO THE SHARE OF THE ASSESSEE WILL BE EQUAL TO THE 50% OF THE MARKET VALUE OF THE LAND PLUS VALUE OF A DDITIONAL FSI, IF ANY, AVAILABLE TO THE ASSESSEE AND UTILIZED BY THE DEVELOPER AS ON TH E DATE OF AGREEMENT WITH THE DEVELOPER. THUS THE 50% OF THE TOTAL MARKET VALUE OF THE LAND PLUS ADDITIONAL FSI, IF ANY, AS ON THE DATE OF AGREEMENT FOR WHICH THE ASSESSEE HAD TO RECEIVE CONSTRUCTED AREA OF HIS SHARE WAS THE CONSIDERATION FOR TRANSFER OF 50% RIGHTS IN THE LAND, WHICH WAS REQUIRED TO BE TAXED AS CAPITAL GA INS IN THE HANDS OF ASSESSEE DEEMED TO BE RECEIVED BY THE ASSESSEE ON THE DATE O F AGREEMENT; HOWEVER THERE BEING CONTROVERSY RAISED BEFORE US ON THIS ASPECT O F THE MATTER, HENCE WE LEAVE THIS ASPECT OF THE MATTER WITHOUT ANY FURTHER DELIBERATI ONS UPON IT. ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 6 11. NOW COMING TO THE MATTER IN CONTROVERSY BEFORE US, AS OBSERVED ABOVE, THE 50% OF THE MARKET VALUE OF THE TOTAL LAND IN QUESTI ON TOGETHER WITH VALUE OF ADDITIONAL FSI, IF ANY, ON THE DATE OF AGREEMENT WO ULD BE DEEMED TO BE THE COST OF CONSTRUCTION OF THE CONSTRUCTED AREA WHICH FALLS IN THE SHARE OF THE ASSESSEE AS PER THE DEVELOPMENT AGREEMENT. ASSESSEE THUS IS ENTITLE D TO PROPORTIONATELY CLAIM DEDUCTION FOR COST OF CONSTRUCTION WHILE TAXING CAP ITAL GAINS ARRIVED FROM THE SALE OF TWO FLATS. THERE WOULD HAVE BEEN APPRECIATION IN TH E VALUE OF THE BUILDING FROM THE DATE OF COMPLETION OF THE CONSTRUCTION TO THE DATE OF SALE WHICH WE TAKE AT 10%, AS THE SAME IN OUR VIEW WOULD BE REASONABLE, IN VIEW O F THE FACTS AND CIRCUMSTANCES OF THE CASE. NOW THE PROPORTIONATE COST OF CONSTRUCTIO N + 10% THEREOF, BEING PROPORTIONATE ESCALATION IN THE VALUE OF TWO FLATS, WILL BE THE SALE PRICE OF THE SUPER STRUCTURES OF THE TWO FLATS. NOW TOTAL SALE PRICE OF THE TWO FLATS MINUS (-) SO ARRIVED SALE PRICE OF THE SUPERSTRUCTURE OF TWO FLATS WILL BE THE SALE PRICE OF THE LAND ATTACHED TO THE SAID TWO FLATS. THE ASSESSEE THEREON WILL BE ENTITLED TO HAVE CLAIM OF DEDUCTION OF COST OF ACQUISITION I.E. PROPORTIONATE VALUE OF LAND AS ON 1.4.1981 PLUS INDEXATION AS PER LAW AND THE INCOME THUS ARRIVED A T WILL BE CHARGEABLE AS LONG TERM CAPITAL GAINS. THE INCOME FROM SALE OF BUILDING PAR T WILL BE CHARGEABLE AS SHORT TERM CAPITAL GAINS. THUS THE ORDER UNDER APPEAL IS HERE BY SET-ASIDE AN D THE CASE IS REMANDED BACK TO AO FOR ASSESSMENT AFRESH IN THE LIGHT OF OB SERVATIONS MADE BY US ABOVE. NEEDLESS TO SAY THAT THE AO WILL GIVE NECESSARY OPP ORTUNITY TO THE ASSESSEE TO PRESENT HIS CASE AND SUBMIT THE NECESSARY DOCUMENTS , IF ANY. THE AO WILL ALSO BE FREE TO MAKE NECESSARY INQUIRIES, IF ANY REQUIRED, FOR THE SAME. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS HEREBY DISMISSED AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE HEREBY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF JUNE, 2013. SD/- SD/- (RAJENDRA SINGH) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 21.06.2013. ITA NO. 3873 /MUM/2011 THE DY. C.I.T. 22(2) V. SHRI JAI TRIKANAND RAO ASSESSMENT YEAR: 2007-08 7 *KKM COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR F BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.