Shri Mohanlal Laljibhai Ghodasara(HUF), JUNAGADH V. The Income Tax Officer, Ward-1(2), JUNAGADH

ITA 44/RJT/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 9117 (ITAT-RAJKOT)
• Duration Of Justice: 5 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 29-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RATHI
• Assessee Lawyers: DM RINDANI
• Keywords: Capital asset; Business income; Set aside; Capital Gains
• Section: 143(3); 2(14)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT ( CONVENED THROUGH VIRTUAL COURT ) BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SMT. MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NO. 44/RJT/2016 ( ASSESSMENT YEAR : 2011-12) SHRI MOHANLAL LALJIBHAI GHODASARA HUF DARPAN, 5 JAYSHREE NAGAR SOCIETY, NEAR TALAV DARWAJA, JUNAGADH / VS. THE INCOME TAX OFFICER WARD -1(2), JUNAGADH ./ ./ PAN/GIR NO. : AABHG0565M ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI D. M. RINDANI, A.R. / RESPONDENT BY : SHRI S. S. RATHI, SR.D.R. DATE OF HEARING 12/01/2021 !'# / DATE OF PRONOUNCEMENT 23/03/2021 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS)-3, RAJKOT, (CIT(A) IN SHORT), DATED 10. 12.2015 ARISING IN THE ASSESSMENT ORDER DATED 04.03.2014 PASSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCERNING AY 2011-12. ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 2 - 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REA D AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS )-3, RAJKOT ERRED IN CONFIRMING THE ACTION OF THE INCOME-TAX OF FICER IN MAKING ADDITION OF RS.1,13,56,933/- BY TREATING THE INCOME FROM SALE OF IMPUGNED PROPERTIES AS BUSINESS INCOME AS A GAINST LONG TERM CAPITAL GAIN OF RS.1,00,56,134/- SHOWN BY THE APPELLANT. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) -3, RAJKOT ERRED IN HOLDING THAT THE APPELLANT PURCHASED AND S OLD THE LANDS WITH THE INTENTION OF ADVENTURE IN THE NATURE OF TR ADE. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) -3, RAJKOT FAILED TO APPRECIATE THE CAPITAL NATURE OF SUCH LAN DS ACCEPTED IN PAST INCOME-TAX ASSESSMENTS, WEALTH-TAX RETURNS AND TREATMENT IN BOOKS. 3. THE RELEVANT FACTS, IN SHORT, ARE THAT THE ASSES SEE FILED RETURN OF INCOME FOR AY 2011-12 DECLARING TOTAL INCOME OF RS.1,03,87,200/- AND AGRICULTURAL INCOME OF RS.1,30 ,633/-. THE RETURN OF INCOME OF ASSESSEE WAS SUBJECTED TO SCRUT INY ASSESSMENT. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOT ICED FROM THE RETURN OF INCOME THAT THE ASSESSEE HUF HAS INTER ALIA SHOWN LONG TERM CAPITAL GAINS OF RS.1,00,56,134/- ON SALE AND/ OR CAPITAL CONTRIBUTIONS TO PARTNERSHIP FIRM OF AS MANY AS 42 IMMOVABLE PROPERTIES BEING LAND PARCELS. THE AO OPINED THAT P ROFITS ARISING FROM LAND SALES TRANSFER OF LAND PARCELS AMOUNTS TO BUSINESS ACTIVITY AND NOT MERELY REALIZATION OF CAPITAL INVESTMENTS. CONSEQUENTLY, A SHOW CAUSE NOTICE UNDER S.142(1) OF THE ACT WAS ISS UED INTENDING TO TREAT THE PROFIT ARISING ON SALE OF SUCH PROPERTIES AS BUSINESS INCOME AND CONSEQUENTLY TO DENY CONCESSIONAL TAX T REATMENT AVAILABLE AS LONG TERM CAPITAL GAINS ARISING ON SAL E OF CAPITAL ASSETS. IN RESPONSE, THE ASSESSEE FILED A DETAILED REPLY NA RRATING FACTS AND CIRCUMSTANCES EXISTING IN CASE IN JUSTIFICATION OF TAXABILITY OF GAINS ARISING ON SALE OF SUCH PROPERTIES UNDER THE HEAD CAPITAL GAINS. THE AFORESAID REPLY OF THE ASSESSEE WAS REPRODUCED BY THE AO IN PARA 4 OF THE ASSESSMENT ORDER. THE AO, HOWEVER, D ID NOT FIND MERIT IN AN ELABORATE JUSTIFICATION CANVASSED ON BE HALF OF THE ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 3 - ASSESSEE. THE AO ACCORDINGLY REALIGNED THE HEAD OF INCOME AND TREATED THE INCOME DECLARED BY ASSESSEE AS BUSINES S INCOME INSTEAD OF CAPITAL GAIN CLAIMED. 4. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). HOWEVER, THE CIT(A) DECLINED TO INTERFERE WITH THE ORDER OF THE AO AND DENIED THE RELIEF CLAIMED BY THE ASSESSEE. 5. FURTHER AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL. 6. WHEN THE MATTER WAS CALLED FOR HEARING, THE LEAR NED AR FOR THE ASSESSEE RELIED UPON THE DETAILED SUBMISSION MA DE BEFORE THE AO & CIT(A) ON FACTUAL ASPECTS. IT WAS ADVERTED TH AT THE ASSESSEE JOINTLY HOLDS ABOUT 215 BIGHA AGRICULTURAL LANDS IN CO-OWNERSHIP AT DIFFERENT LOCATIONS AT JUNAGADH. IT WAS SUBMITTED THAT THE ASSESSEE HAS DERIVED AGRICULTURAL INCOME FROM THE LAND PARCE LS ACQUIRED MAINLY IN F.Y. 2003-04 AS TABULATED AT PAGE NO.10 O F THE ASSESSMENT ORDER. THE LAND PARCELS WERE CONVERTED INTO NON-AG RICULTURAL LAND IN F.Y. 2004-05 EXCEPT GREEN CITY LAND WHICH WAS CONVE RTED IN F.Y. 1998-99. EVEN AFTER CONVERSION, THE ASSESSEE CONTI NUED TO HOLD THE LAND FOR ABOUT 5-6 YEARS BEFORE A PART OF IT COULD BE SOLD IN F.Y. 2010-11 RELEVANT TO AY 2011-12 IN QUESTION. IT WAS SUBMITTED THAT THREE LAND PARCELS WERE INTER ALIA TRANSFERRED TO THE PARTNERSHIP FIRM AS A CAPITAL CONTRIBUTION IN THE CAPACITY OF A PART NER. IT WAS FURTHER SUBMITTED THAT INTENTION OF THE ASSESSEE TO HOLD TH E LAND PARCELS AS CAPITAL INVESTMENT WAS LOUD AND CLEAR FROM THE TREA TMENT GIVEN IN THE BOOKS MAINTAINED BY THE HUF. IT WAS ASSERTED T HAT THE ASSESSEE HAS SIMULTANEOUSLY FILED WEALTH TAX RETURN YEAR AFT ER YEAR FROM F.Y. 2006-07 TO 2009-10 WHERE THE LAND IMPUGNED LAND PAR CELS WERE SHOWN AS INVESTMENT FOR THE PURPOSES OF DETERMINATI ON OF WEALTH TAX ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 4 - LIABILITY. IT WAS THEREAFTER SUBMITTED THAT HAD TH E IMPUGNED LAND IN QUESTION WERE TREATED AS STOCK-IN-TRADE/BUSINESS AS SET/TRADING ASSET INSTEAD OF CAPITAL ASSET, NO WEALTH TAX LIABILITY W OULD ARISE. IT WAS NEXT SUBMITTED THAT NO INTEREST BEARING LOANS WERE UTILIZED IN ANY YEAR FOR ACQUISITION OF LAND PARCELS HELD FOR SUCH LONG TIME. IT WAS STATED THAT NO SPECIAL DEVELOPMENT EXPENSES HAVE BE EN INCURRED WHICH WOULD EXPRESS THE COMMERCIAL INTENTS OF ASSES SEE. 6.1 IT WAS FURTHER ARGUED THAT THE TRANSFER OF LAND TO THE PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION IS DEEMED AS TRANSFER IN THE DEFINITION PROVIDED UNDER S.2(47) OF THE ACT. CONSEQUENTLY, THE ASSESSEE IS LIABLE TO CAPITAL GAIN TAX UNDER S.45(3 ) OF THE ACT ON SUCH UNREAL TRANSFERS BUT ONLY WHERE THE CAPITAL IN VESTMENT IS TRANSFERRED BY ASSESSEE PARTNER. IF THE ALLEGATION S OF THE AO IS ACCEPTED THAT THE PROFITS ARISING ON SALE/TRANSFER OF LAND PARCELS ARE BUSINESS ACTIVITY THEN LONG TERM CAPITAL GAIN DECLA RED TO THE EXTENT OF RS.41,35,806/- AS CAPITAL CONTRIBUTIONS TO FIRM OUT OF THE TOTAL AMOUNT OF RS.1,00,56,134/-WOULD NOT BE REGARDED AS TRANSFER UNDER S.2(47) OF THE ACT AND CONSEQUENTLY WOULD NOT LIABL E FOR TAXATION AT ALL. 6.2 IT WAS NEXT CONTENDED THAT THE ASSESSEE HAS NOT SOLD ANY PROPERTY IN THE EARLIER YEAR OR IN THE SUBSEQUENT Y EAR AND THERE IS TOTAL ABSENCE OF REGULARITY, FREQUENCY OR A SYSTEMA TIC ACTION ON THE PART OF THE ASSESSEE. IT WAS CONTENDED THAT IN THE SE CIRCUMSTANCES NARRATED ABOVE, THE AO AND THE CIT(A), BOTH HAVE AP PLIED WRONG TESTS TO DENY THE CONCESSIONAL TAX TREATMENT AVAILA BLE ON TRANSFER OF CAPITAL ASSET OF LONG TERM HOLDING. IT WAS SUBMITT ED THAT THE REVENUE AUTHORITIES HAVE WRONGLY JUSTIFIED THEIR AC TION PRIMARILY ON THE GROUND THAT THE ASSESSEE IS A JOIN HOLDER OF LA ND WITH OUTSIDE PARTIES AND THEREFORE THE INTENTION WAS TO EXPLOIT THE ASSET ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 5 - COMMERCIALLY AS PER MARKET PRACTICES AND THE AGRICU LTURAL INCOME IS QUITE MEAGER. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER DEFENDED HIS ACTION AND SUBMITTED THAT THAT MERELY BECAUSE L AND PARCELS WERE CONVERTED INTO PLOTS AND PART OF IT WAS SOLD OUT C OULD NOT BE REGARDED AS ADVENTURE IN THE NATURE OF TRADE, COMME RCE ETC. PER SE . THE CONVERSION WAS CARRIED OUT TO FACILITATE THE MA RKETABILITY OF LAND PARCELS. 6.3 THE LEARNED COUNSEL ACCORDINGLY PLEADED THAT UN JUSTIFIED ACTION OF THE REVENUE AUTHORITIES REQUIRES TO BE CA NCELLED AND CLAIM OF THE ASSESSEE TO TREAT THE GAINS ARISING ON SALE OF LAND / PLOTS AS CAPITAL GAIN REQUIRES TO BE RESTORED. 7. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE ORDERS OF LOWER AUTHORITIES AND CONTENDED THAT THE CONDUCT OF ASSESSEE IS WITH SET PURPOSES TO EXPLOIT THE LAND PARCELS WITH COMME RCIAL SPIRIT AND THUS THE PROFITS ARISING FROM SUCH ENDEAVORS HAS BE EN RIGHTLY TREATED AS BUSINESS INCOME BY THE REVENUE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. THE SUBSTANTIVE QUES TION PLACED FOR OUR CONSIDERATION IS WHETHER THE REVENUE AUTHORITIE S WERE JUSTIFIED IN REALIGNING AND TREATING THE CAPITAL GAINS DECL ARED BY THE ASSESSEE ON SALE OF CERTAIN LAND PARCELS TO BE BUS INESS INCOME OF THE ASSESSEE (INVITING HIGHER TAX SLABS) IN THE GIV EN FACTS AND CIRCUMSTANCES. 8.1 THE ISSUE IS ESSENTIALLY FACTUAL AND THUS NO RI GID LEGAL PRINCIPLES COULD BE APPLIED TO DETERMINE THE ISSUE. WE HAVE THUS EXAMINED THE ISSUE FROM FACTUAL PERSPECTIVE AS BROU GHT TO OUR NOTICE. ON PERUSAL OF THE CONTENTIONS ON BEHALF OF THE ASSESSEE, WE ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 6 - FIND PERSUASIVE FORCE IN THE CLAIM MADE ON BEHALF O F THE ASSESSEE THAT SALE OF 39 PLOTS/LAND PARCELS AND TRANSACTION OF CAPITAL CONTRIBUTION OF 3 PLOTS TO PARTNERSHIP FIRM OUT OF 215 BIGHA AGRICULTURAL LAND CANNOT BE REGARDED AS BUSINESS A CTIVITY IN THE GIVEN SET OF FACTUAL MATRIX. 8.2 AS PER STATED FACTS, THE TRANSACTIONS ENTERED I NTO ARE NEITHER REGULAR NOR CONTINUOUS TO RANK IT PARI PASSU WITH SOME ACTIVITIES OR ADVENTURES OF COMMERCE. THE CHARACTERIZATION OF LA ND PARCELS IN THE BOOKS OF ACCOUNTS AS CAPITAL ASSET COUPLED WITH W EALTH TAX RETURN FILED BY THE ASSESSEE ON SUCH CAPITAL INVESTMENTS, ADEQUACY OF ITS OWN CAPITAL CLEARLY UNDERCOURSE THE MANIFEST INTENT ION OF THE ASSESSEE TO HOLD LAND PARCELS/PROPERTIES AS CAPITA L ASSET AS CLAIMED. 8.3 WE NOTE THAT ASSESSEE HAS FACTUALLY DEMONSTRATE D ITS CONDUCT OF LACK OF REGULARITY, FREQUENCY & REPETITION IN TH E PURCHASE AND SALE OF LAND PARCELS FROM THE COMPARABLE STATISTICS YEAR AFTER YEAR. WE FIND IT APPARENT THAT THE AO WAS SIMPLY GUIDED B Y THE CONSIDERATIONS OF REVENUE ALONE OUTSIDE THE BOUNDS OF RATIONALITY. THE AO HAS BRUSHED ASIDE THE RELEVANT PLEAS PUT FOR TH ON BEHALF OF THE ASSESSEE AND ACTED ON IRRELEVANT CONSIDERATIONS . THE AO HAS OMITTED TO ATTACH ANY WEIGHT TO THE FACT THAT THE Y IELD BY WAY OF AGRICULTURAL INCOME WAS REPORTED YEAR AFTER YEAR ON SUCH LAND. THIS APART, THE ASSESSEE HAS SOLD THE LAND IN F.Y. 2011- 12 AFTER OBTAINING PERMISSION FOR CONVERSION OF LAND TO NON-AGRICULTUR AL LAND WAY BACK IN F.Y. 2004-05 I.E. AFTER A GAP OF 5-6 FINANCIAL Y EARS. FOR TAKING ADVERSE VIEW, THE AO WAS MAINLY GUIDED BY THE FACT THAT AGRICULTURAL INCOME IS MEAGER AND THE ASSESSEE APPL IED FOR CONVERSION IMMEDIATELY AFTER ACQUISITION OF LAND WH ICH REVEALS THE INTENTION OF COMMERCIAL SPIRIT. THE CUMULATIVE EFF ECTS OF ALL ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 7 - CIRCUMSTANCES MOST OF WHICH SIGNIFIES THE CAPITAL O RIENTATION WERE NOT WEIGHED AND CO-OWNERSHIP WITH THIRD PARTY WAS G IVEN UNDUE PRIMACY. 8.4 SIGNIFICANTLY, THE PROVISIONS OF SECTION 2(14) OF THE ACT DEFINES A CAPITAL ASSET WHEREBY PROPERTY OF ANY K IND HELD BY THE ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINES S OR PROFESSION WOULD FALL WITHIN THE SWEEP OF EXPRESSION CAPITAL ASSET. THUS, THE LAW DOES NOT EXPECT COMPLETE ABSENCE OF BUSINESS CO NNECTION OF AN ASSET FOR THE ASCERTAINMENT OF THE CHARACTER OF ASS ET. PROPERTY OF ANY KIND IS SOMEWHAT SWEEPING IN NATURE WHICH STI PULATES THAT PROPERTY COULD BE CAPITAL ASSET, EVEN IF, CONNECTED WITH BUSINESS OF THE ASSESSEE. 8.5 IN THE INSTANT CASE, THE REVENUE COULD NOT DEMO NSTRATE ANY REAL SUBSTANTIVE AND SYSTEMATIC COURSE OF ACTIVITY OR CONDUCT ON THE PART OF THE ASSESSEE TO CHARACTERIZE THE INCOME TO BE SOURCED FROM A BUSINESS ACTIVITY INDUCED BY COMMERCIAL SPIRIT. TH E ASSESSEE IS ENTITLED IN LAW TO HOLD CERTAIN CLASS OF ASSET AS CAPITAL ASSET EVEN WHILE HE IS DEALING WITH THE ASSETS OF SIMILAR NATU RE IN BUSINESS WITH COMMERCIAL OBJECTIVES. IN THE INSTANT CASE, THE AO HAS INTER ALIA ALLEGED THAT THE ASSESSEE IS ENGAGED IN A SYSTEMATI C COMMERCIAL EXPLOITATION OF LAND IN THE CAPACITY AS A PARTNER W ITH OTHER CO- OWNERS. THIS, IN OUR VIEW, CANNOT BE SEEN AS AN HA NDICAP IN THE HANDS OF HUF ASSESSEE AND WOULD NOT DEPRIVE THE HUF ASSESSEE OF TREATING THE ASSETS AS CAPITAL ASSETS. THUS, IN TH E TOTALITY OF EXTENUATING CIRCUMSTANCES EXISTING IN THE PRESENT C ASE, WE FIND THAT PLEA OF THE ASSESSEE HAS MERITS AND DESERVES ACCEPT ANCE. 8.6 WE ACCORDINGLY HOLD THAT CLAIM OF ASSESSEE TO C HARACTERIZE THE GAIN ARISING ON SALE OF LAND PARCELS IN QUESTION TO BE CHARGEABLE ITA NO. 44/RJT/2016 [SHRI MOHANLAL LALJIBHAI GHODASARA HUF VS. ITO] A.Y. 2011-12 - 8 - UNDER THE HEAD CAPITAL GAIN CANNOT BE DISLODGED A ND REPLACED BY BUSINESS INCOME. HENCE, WE SET ASIDE THE ORDER OF THE REVENUE AUTHORITIES AND RESTORE THE ACTION OF THE ASSESSEE IN THIS REGARD. 9. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED . SD/- SD/- (MADHUMITA ROY) (PRADIP KUMAR K EDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 23/03/2021 TRUE COPY S. K. SINHA / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 DEPUTY/ASSTT. REGISTRAR ITAT, RAJKOT THIS ORDER PRONOUNCED IN OPEN COURT ON 23/03 /2021