ACIT, Salem V. Shri C.Muthu, Salem

ITA 974/CHNY/2010

• Counselvise Citation: 97421714 RSA 2010
• Duration Of Justice: 1 year(s) 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 19-01-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 17-06-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: G BASKAR
• Keywords: Capital asset; Business income
• Section: 147; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER ITA NOS.974 & 975(MDS)/2010 ASSESSMENT YEARS : 2002-03 & 2003-04 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE III, SALEM. VS. SHRI C.MUTHU, PUDUR, MECHERI VIA, METTUR TALUK, SALEM DISTT. PAN ACQPM0327G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHAJI P JACOB, I RS, ADDL. COMMISSIONER OF INCOME-TAX RESPONDENT BY : SHRI G.BASKAR, ADVOCATE DATE OF HEARING : 19 TH JANUARY, 2012 DATE OF PRONOUNCEMENT : 23 RD JANUARY, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THESE TWO APPEALS ARE FILED BY THE REVENUE. THE RELEVANT ASSESSMENT YEARS ARE 2002-03 AND 2003-04. THE APPEALS ARE DIRECTED AGAINST THE COMMON ORDER PASSE D BY THE COMMISSIONER OF INCOME-TAX(APPEALS) AT SALEM, ON 30 -3-2010. THE APPEALS ARISE OUT OF THE ASSESSMENTS COMPLETED UNDER - - ITA 974 & 975 OF 2010 2 SECTION 143(3), READ WITH SECTION 147 OF THE INCOME -TAX ACT, 1961. 2. THE ASSESSEE IN THIS CASE HAD MADE PAYMENTS TOWARDS PURCHASE CONSIDERATION TO BUY A VACANT SITE AT LLOYDS ROAD, CHENNAI. THE POSSESSION OF THE PROPERTY WAS TAKEN OVER BY THE ASSESSEE AS A DEVELOPER. ALONGWITH THE POSS ESSION, THE ASSESSEE ALSO OBTAINED GENERAL CONTROL OVER THE PRO PERTY AS CONSENTED BY THE TRANSFEROR. THE SITE WAS SO ACQUI RED ON 17-2-1998. LATER ON, THE ASSESSEE SOLD THE UNDIVID ED RIGHTS IN THE SAID PROPERTY TO VARIOUS PERSONS WITHIN A PERIO D OF TWO YEARS ENDING ON 31-3-2002 AND ENDING ON 31-3-2003. HE RE CEIVED A CONSIDERATION OF ` 1,08,33,000/- IN THE YEAR ENDING ON 31-3-2002 AND ` 65,69,480/- FOR THE YEAR ENDING ON 31-3-2003. 3. THE ASSESSEE ALSO CONSTRUCTED TWELVE RESIDENTIA L FLATS IN THE SAID VACANT SITE AT LLOYDS ROAD AND SO LD ELEVEN FLATS TO THOSE PERSONS TO WHOM THE UNDIVIDED RIGHTS IN TH E LAND WERE ALREADY SOLD. THE ASSESSEE KEPT ONE FLAT FOR HIMSE LF ALONGWITH THE PROPORTIONATE RIGHT IN THE UNDIVIDED LAND. THE SE TRANSACTIONS GENERATED GAINS IN THE HANDS OF THE ASSESSEE. - - ITA 974 & 975 OF 2010 3 4. WHILE FILING THE RETURNS FOR THE IMPUGNED ASSESSMENT YEARS 2002-03 AND 2003-04, THE ASSESSEE TREATED THESE GAINS IN TWO DIFFERENT WAYS. THE PROFITS EAR NED BY THE ASSESSEE IN TRANSFERRING THE UNDIVIDED RIGHTS IN TH E VACANT PLOT HAVE BEEN TREATED BY THE ASSESSEE AS LONG-TERM CAPI TAL GAINS ON THE GROUND THAT THE LAND ACQUIRED BY HIM WAS SOLD A FTER A PERIOD OF THREE YEARS. THE PROFIT ON TRANSFER OF LAND WAS THUS CLAIMED BY THE ASSESSEE TO BE LONG-TERM CAPITAL GAINS. THAT P ART OF THE PROFIT EARNED BY THE ASSESSEE ON SALE OF THE FLATS TO ELEVEN PERSONS HAS BEEN TREATED BY THE ASSESSEE AS BUSINES S INCOME. 5. THE ASSESSING OFFICER ANYHOW TREATED THE ENTIRE GAINS AS PROFITS OF THE BUSINESS CARRIED ON BY THE ASSESSEE. HE DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE SURPLUS ARISING ON TRANSFER OF UNDIVIDED RIGHTS IN THE VACA NT LAND AT LLOYDS ROAD AMOUNTED TO LONG-TERM CAPITAL GAINS. THE ENTI RE PROFITS WERE TAKEN TO BE BUSINESS PROFITS AND THE SAME WAS TAXED ACCORDINGLY. 6. IN FIRST APPEAL, THE COMMISSIONER OF INCOME- TAX(APPEALS) ACCEPTED THE CONTENTION OF THE ASSESSE E ON THE DIFFERENTIAL TREATMENT OF THE PROFITS AND DIRECTED THE ASSESSING - - ITA 974 & 975 OF 2010 4 OFFICER TO TREAT THE PROFITS RELATING TO SALE OF UN DIVIDED RIGHTS IN THE LAND AS LONG-TERM CAPITAL GAINS. THE REVENUE I S AGGRIEVED AND, THEREFORE, THESE APPEALS BEFORE US. 7. WE HEARD SHRI SHAJI P JACOB, THE LEARNED COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVENU E AND SHRI G.BASKAR, THE LEARNED COUNSEL APPEARING FOR TH E ASSESSEE. 8. THE LEARNED COMMISSIONER OF INCOME-TAX ARGUED THAT THE ASSESSEE HIMSELF HAS ADMITTED THAT THE POS SESSION OF THE LAND WAS TAKEN OVER BY HIM IN HIS CAPACITY AS A PROMOTER AND DEVELOPER OF LAND AND FLATS TO BE CONSTRUCTED THERE ON. THIS IS EVIDENT FROM THE RECITALS OF THE AGREEMENT ITSELF. THESE CLEARLY SHOWED THAT THE ASSESSEE HAD ACQUIRED THAT PROPERTY TO CARRY ON THE BUSINESS OF BUILDER AND DEVELOPER. WHAT ACTIVI TY THE ASSESSEE HAD CARRIED OUT WAS EXACTLY THE SAME AS TH AT OF A DEVELOPER AND BUILDER. THE ASSESSEE CONSTRUCTED TW ELVE FLATS IN THE PROPERTY AND SOLD ELEVEN UNITS TO BUYERS AND KE PT ONE UNIT FOR HIMSELF. IT IS, THEREFORE, VERY CLEAR THAT WHAT HA S BEEN ACCOMPLISHED BY THE ASSESSEE WAS A BUSINESS VENTURE . THEREFORE, THE ENTIRE PROFIT ARISING OUT OF THE DIV ISION OF THE LANDED PROPERTY AND THEREAFTER CONSTRUCTING FLATS T HEREON AND - - ITA 974 & 975 OF 2010 5 SELLING BOTH FLATS AND UNDIVIDED RIGHTS IN THE LAND TO OTHERS ARE NOTHING BUT BUSINESS PROFIT. THE CONTENTION OF THE ASSESSEE THAT THE PROFIT RELATED TO THE TRANSFER OF UNDIVIDED RIG HT IN THE LAND IS ONLY A PLEA TO EVADE PAYMENT OF TAX AT THE NORMAL R ATE. 9. THE LEARNED COUNSEL APPEARING FOR THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT THE POSSESSION OF TH E PROPERTY WAS TAKEN OVER BY THE ASSESSEE WITH AN INTENTION TO CONSTRUCT A RESIDENTIAL HOUSE FOR HIMSELF. HE NEVER HAD THE IN TENTION TO CARRY ON BUSINESS OF DEVELOPER AND PROMOTER WITH THAT PIE CE OF LAND IN HIS POSSESSION. BUT, LATER ON, WITH A NUMBER OF CO NSTRAINTS, HE WAS NOT IN A POSITION TO CONSTRUCT A RESIDENTIAL HO USE FOR HIMSELF IN THAT PROPERTY. THEREFORE, TO REALIZE THE MONEY SPENT ON THE PURCHASE OF THE PROPERTY, HE HAD TO CONSTRUCT TWELV E FLATS ON THE VACANT LAND AND HE HAD TO SELL ELEVEN OF THEM TO OU TSIDERS. BUT HE HAS RETAINED ONE FLAT IN THE PROPERTY COMPLEX, W HICH CLEARLY SHOWED THAT HIS INTENTION WAS TO CONSTRUCT A RESIDE NTIAL HOUSE FOR HIMSELF. THE LEARNED COUNSEL, THEREFORE, SUBMITTED THAT THAT PART OF THE TRANSACTION RELATING TO ACQUISITION OF LAND AND LATER ON TRANSFER OF UNDIVIDED RIGHTS TO DIFFERENT PERSONS I N THAT LAND HAS TO BE TREATED AS AN INDEPENDENT TRANSACTION OF PURCHAS E AND SALE - - ITA 974 & 975 OF 2010 6 OF LAND AND, THEREFORE, ANY PROFIT ARISING OUT OF T HAT TRANSACTION MUST BE TREATED AS LONG-TERM CAPITAL GAINS. 10. WE HEARD BOTH SIDES IN DETAIL. AS RIGHTLY POI NTED OUT BY THE LEARNED COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVENUE, THE PROPERTY WAS IDENTIFIED AND ACQUIRED B Y THE ASSESSEE AS A PROMOTER AND DEVELOPER OF PROPERTIES. THE ABOVE STATED OBJECTIVE WAS REALISTICALLY FOLLOWED BY THE ASSESSEE BY CONSTRUCTING TWELVE DWELLING UNITS ON THE PROPERTY AND SELLING ELEVEN OF THEM TO OUTSIDERS. WHAT IS TO BE SEEN IN THE PRESENT CASE IS THAT THE TRANSFER OF UNDIVIDED RIGHTS IN TH E PROPERTY AND THE SALE OF FLATS, BOTH ARE SCHEMES OF A SINGLE IND IVISIBLE TRANSACTION. THERE IS NO PRACTICAL USE AT ALL IN THE TRANSFER OF UNDIVIDED RIGHTS IN THE PROPERTY TO ELEVEN OTHER PE RSONS IF THOSE ELEVEN PERSONS ARE ALSO NOT GETTING ALLOTMENT OF FL ATS. THEY CANNOT EXPLOIT THE PROPERTY ON THE BASIS OF THE UND IVIDED RIGHTS ALLOTTED TO THEM IF THE PLOT REMAINED VACANT. THER EFORE, THERE CANNOT BE SUCH AN INDEPENDENT TRANSACTION THAT THE ELEVEN PERSONS ARE MAKING PAYMENTS TO THE ASSESSEE TO ACQU IRE UNDIVIDED RIGHTS IN THE SAID PROPERTY, AS SUCH. TH AT IS AGAINST ALL REASONING AND PRUDENCE OF BUSINESS. NOBODY WILL AC QUIRE SUCH - - ITA 974 & 975 OF 2010 7 A USELESS RIGHT. THE UNDIVIDED RIGHTS ACQUIRED BY THOSE PERSONS TRANSFORMS INTO A PROTECTIVE RIGHT ONLY WHEN FLATS ARE CONSTRUCTED ON THE LAND AND THOSE PERSONS ARE ALLOTTED FLATS IN THEIR NAMES. THAT WAS EXACTLY HAPPENED IN THE PRESENT CASE. ALL THESE PERSONS WHO HAD PURCHASED UNDIVIDED RIGHTS IN THE L AND WERE ALLOTTED RESIDENTIAL FLATS ALSO. RESIDENTIAL FLATS CANNOT BE CONSTRUCTED WITHOUT LAND. THEREFORE, IT IS NOT NEC ESSARY TO EXPLAIN TOO MUCH TO UNDERSTAND THE SIMPLE FACT THAT THE PURCHASE OF THE PROPERTY WAS ULTIMATELY CONTEMPLATED FOR CON STRUCTING FLATS THEREON AND THEREAFTER TO SELL THEM TO ALLOTTEES AL ONGWITH THE UNDIVIDED RIGHTS IN THE LAND. IT IS A COMPOSITE TR ANSACTION OF DEVELOPING RESIDENTIAL UNITS AND SELLING THEM TO WI LLING BUYERS. THEREFORE, THERE IS NO REASON FOR THE CLAIM OF THE ASSESSEE TO TREAT THAT PART OF THE TRANSACTION RELATING TO THE LAND AS INDEPENDENT, RESULTING IN LONG-TERM CAPITAL GAINS. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN AP PRECIATING THE REAL NATURE OF THE TRANSACTION ENTERED INTO BY THE ASSESSEE IN PURCHASING THE LAND AS WELL AS IN TRANSFERRING THE UNDIVIDED RIGHTS IN THE LAND AND ALSO IN CONSTRUCTING AND SELLING TH E DWELLING UNITS. - - ITA 974 & 975 OF 2010 8 THE ASSESSING OFFICER HAS RIGHTLY TREATED THE ENTIR E PROFIT AS BUSINESS INCOME. 11. THE ORDERS OF THE COMMISSIONER OF INCOME- TAX(APPEALS) ON THIS POINT ARE SET ASIDE AND THE OR DERS OF THE ASSESSING OFFICER ARE RESTORED. 12. IN RESULT, THESE TWO APPEALS FILED BY THE REVE NUE ARE ALLOWED. ORDER PRONOUNCED ON MONDAY, THE 23 RD OF JANUARY, 2012 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 23 RD JANUARY, 2012. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.