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2018 (8) TMI 662
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....uri is decided as under. ITA.No.2310/Del./2011 - A.Y.2006-2007 (Shri Mohinder Puri). 3. The Revenue has filed the appeal on the following grounds : 1. On the fact and in the circumstances of the case, the CIT(A) has erred in law and on facts in holding that sale of land by the assessee was of capital assets and the profit thereon was in the nature of capital gain as against business profit held by the Assessing Officer. 2. On the facts and in the circumstances of the case, the CIT(A) has erred in law1 and on facts in directing the AO to allow to the assessee the benefit of section 54F of the Income Tax Act, 1961. 3. On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 77,04,873/- made by the Assessing Officer on account of bogus land development expenditure. 4. The facts of the case are that assessee is an individual and filed return of income on 31.01.2007 declaring total income of Rs. 55,94,790/- which was later revised to Rs. 55,94,770/-. The total income included long term capital gain of Rs. 37,12,316/- on the sale of land admeasuring 1.31 acres at village Wazirabad, ....
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....tary transaction entered into with intention of earning profit on accretion. Assessee was not a dealer in land. The period of holding shows that the assessee intended to earn capital gain by realizing a better price. Conditions of Circular No.4 of 2007 are applicable to show sale was of capital asset. The assessee claimed benefit of deduction under section 54F which goes to show that the intended sale was by way of sale of capital asset. PCL was only authorised to sell the subject land along with land owned by it. It did not mean that the nature and intention of sale by the assessee was the same as the nature and intention of sale by PCL. Just because the land was held by PCL as a stock-in-trade would not ipso facto lead to the inference that the land owned by the assessee was also held by way of stock-in-trade. The A.O. did not accept the explanation of the assessee and held that the income was to be assessed under the head "Business" and denied exemption under section 54F of the I.T. Act. The assessee challenged the assessment order before Ld. CIT(A). The Ld. CIT(A) reproduced the written submissions of the assessee in the appellate order which is as under: (i) "One of t....
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....r is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture, for instance, a man who purchases a large quantity of aeroplane linen and sells it in different lots, and, for the purpose of selling starts an advertising campaign, rents offices, engages an advertising manager, a linen expert and a staff of clerks, maintains account books normally used by a trader, and passes receipts and payments in connection with the linen through a separate banking account : Martin v. Lowry [1926] II Tax Cas 297; a person who caries on a money-lending business purchases very cheaply a vast quantity of toilet paper and within a short time thereafter sells the whole consignment at a considerable profit: Rutldege v. IRC [1929] 14 Tax Cas 490: and a person, even though he has no special knowledge of the trade in wines and spirits, purchases a large quantity of whisky and sells it without taking delivery of it at a considerable profit: ITC v. Fraser 1942] 24 Tax Cas 498, may be presumed, having regard, to....
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....urther observed that (page 262): "If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realized on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realizing his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction." (iv) The Hon'ble Bombay High Court in the case of CIT v. Principal Officer, Laxmi Surgical P. Ltd. reported in [1993] 202 ITR 601 after applying the test laid down by the Hon'ble Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 and other cases has held that any transaction undertaken with an intention to earn profit is not enough to give it the character of st....
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....e character. In each case, it is the total effect of all the relevant factors and circumstances that determines the character of the transaction" (vii) CIT v. Kasturi Estates (P) Ltd. 62 ITR 578 Madras, is a judgment which is truly relevant for deciding the controversy in the present case for more than one reason. In the first place it has considered the three judgments of which the reference has been made (supra) viz. cases of (a) Californian Copper Syndicate v. Harris; (b) Janaki Ram Bahadur Ram v. CIT and (c) G. Venkataswami Naidu & Co. v. CIT. Secondly, the law on the very controversy as appearing in the present case has been discussed at length. Further, the facts in this judgment are in fact a degree away from the facts of the present case and yet it has been held that it was not a case of adventure in the nature of trade, but the profit was taxable as capital gain. Since the case has dealt with the matter eloquently and comprehensively, it is considered proper to refer to this judgment at some length hereinafter for assistance in deciding the present appeal. * The assessee in this case had parcelled into plots, one of the pieces of land in the city, incurre....
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....f trade": " (1) The subject-matter of the realization. - While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does. (2) The Length of the period of ownership. - Generally speaking, property meant to be dealt in is realized within a short time after acquisition. But there are many exceptions from this as a universal rule. (3) The frequency or number of similar transactions by the same person. - If realizations of the same sort of property occur in succession over a period of years or there are several such realizations at about the same date, a presumption arises that there has been dealing in respect of each. (4) Supplementary work on or in connection with the property realized . - If the property is worked up in any way during the ownership so as to bring it into more mark....
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.... and all other facts including absence of evidence of any trading activity or speculative venture, we are of the view, therefore, that the Tribunal was right in its conclusion that the surplus from sale of the land did not result from any trade or business in land carried on by the assessee or from any transaction which may properly be described as an adventure in the nature of trade." (viii) In CIT v. MLM. Mahalingam Chettiar 107 ITR 236 Madras, on almost identical facts, the decision in Kasturi Estates Pvt. Ltd. (supra) was followed. (ix) Vesta Investments & Trading Co. (P) Ltd. v. CIT [1999] 70 ITD 200 (Chd) Kind attention is invited to para 5 of the order where the Hon'ble Bench has referred to the guidelines for deciding the issue whether the profit is by way of capital gain or business profit. The conclusion is in para 7. This judgment lucidly explains some of the contours of controversy and basis for deciding the issue and is also helpful in the present case for arriving at the conclusion. (x) In Asstt. CIT v. Ashok Motilal Kataria [2009] 308 ITR (AT) 298 Pune Reference is invited to this judgment which explains the true concept of adventure in the....
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....ots and Incurred expenses for laying roads on filling up, corporation survey, centage and other matters, yet the court held that these steps were no more than enabling the assessee to earn a better price rather than plunging into the waters of trade. The assessee's case is far stronger on facts to conclude that it was not an adventure in the nature of trade. Way back in Janaki Ram Bahadur Ram (supra) it was laid down that the mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade. 7.2 We derive strength (as we have done by citing and relying upon CBDT Circular No. 4/2007 dt. 15/6/2007) by referring to the "badges of trade" summarized by the Royal Commission on "The Taxation of Profits and Income" in their final report in 1955. The present transaction, if tested on the principles laid down by the Royal Commission, it is submitted, does not give rise to a profit taxable as business income as we explain hereinafter: (i) Viewed objectively it cannot be said that the isolated transaction of the purchase of land by the assessee was subject matter of trading. The land was not a....
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....der a common agreement to sell for the sake of convenience, does not make the transaction a joint venture. Each landowner was full owner of the land sold and each owner was entitled to receive - and in fact also received - his/its share of the sale consideration. (iii) The Assessing Officer in para 5.2 has referred to certain agreements with ITC Classic Real Estate Finance Ltd., M/s. Larsen & Toubro Ltd. and M/s. Ansal Housing Construction Ltd., and from this has inferred that the assessee was in joint business collaboration with PCL in respect of the land. No doubt such agreements were entered into in the past and in fact a comprehensive account of such agreements is also mentioned in the Agreement dated 4th April, 2005. But, it is notable that none of these agreements were acted upon and they were terminated/cancelled/rescinded and brought to end before entering into agreement with PDL. This is clear from para l(q) at page 12 of the agreement dated 4th April, 2005, where it is clearly mentioned that PDL is in full and peaceful possession of the entire 23.815 acres of land in Sector 53, covered under the said agreement. Also in para 3(b) at page 17 of the agreeme....
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....of the proceeds, albeit through PCL. This is infact a relevant matter which cannot be ignored. The mention in para l(i) of the agreement dated 4/4/2005, as already stated, is a non-issue because that agreement was never implemented. (vi) The observations in para 5.5 are subjective and not backed by any evidence or material on record. The highest court has held that it is for the revenue to establish that a certain transaction is an adventure in the nature of trade. (vii) In Paras 5.6 and 5.7 the AO has referred to the judgment of the Supreme Court in G, Venkataswami Naidu (supra). Referring to selectively some observations the AO, without adding anything more, has concluded that in the present case the transaction was an adventure in the nature of trade. It is submitted that the AO has been less than fair in not explaining the correct impact of judgment. In fact we have quoted in extenso in para 6 (vi) above extract from the judgment the observations of Gajendragadkar J. (as his Lordship then was) which speaks for itself. That was the analysis made by the learned judge, which in fact applies in our case to conclude that the transaction resulted in capital....
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....allowed." 4.4 The assessee further submitted that the decision of the Hon'ble Supreme Court relied upon by the A.O. in the case of G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 was distinguishable on facts and rather help the assessee. The extract of the submissions of the assessee as reproduced in the appellate order as under : "4. Naidu's case is one of the foremost cases in which the erudite judge dealt with the whole gamut of the complex question and it contains a formidable exposition on the question in issue, We shall advert to it infra. 5. In the initial part of the judgment it is stated that the question whether a transaction is an adventure in the nature of trade is a mixed quest of facts and law. It is therefore permissible to challenge the conclusion on the ground that inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence. 6. At pages 609 and 610 of the report, the Court after pointing out that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction, laid down broad principles to assist in determining the character of t....
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....ge 609. " Where land purchased, and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset in Cayzer, Irvin and Co Ltd. v. Commissioners of Inland Revenue. In his judgment, Lord President Normand referred to the large development expenditure incurred by the assessee to improve the property and observed that it appeared to be on the whole consistent with the idea that it was carrying on a trade in land rather than with the idea that it was throughout holding it as an investment only to be realized if at all when it desired to meet some financial need. In repelling the plea that the transaction showed investment, the Lord President added that the Commissioners "with their knowledge and experience of these matters, have come to the conclusion that the intention was to hold this estate not as an investment but as a trading asset and in order to develop it and to market it" It would thus appear that the conduct of the assessee in incurring a large amount of expenditure on the development of land consisting mainly in the constru....
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....or Rs. 521 and it covered a piece of land admeasuring 28 ¼ cents; the second purchase related to 2 acres 79/2 cents and the price paid was Rs. 1,250; while the third and the fourth purchases were for Rs. 1,942 and Rs. 5,000 and they covered 28% cents and 1 acre and 90 cents respectively. The property purchased under the first sale deed was sold on November 10, 1947for Rs. 2,825 whereas the three remaining properties were sold on September 1, 1947for Rs. 49,775, the purchaser in both cases being the Janardana Mills Ltd. The purchase of the first item of property by the appellant had been made in the name of Mr, V. G. Raja, assistant manager of the Janardana Mills Ltd., who is the son-in-law of G. Venkataswami Naidu, one of the partners of the appellant firm. Naturally when this property was sold to the mills the document was executed by the ostensible owner v .G. Raja. It is not disputed that the purchase in the name of V.G. Raja was benami for the appellant. All the plots which were thus purchased by the appellant piecemeal are contiguous and they adjoin the mills. On the plot purchased on June 29, 1942, there stood a house of six rooms which fetched an annual rent of about ....
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....land is generally the subject-matter of investment. It is contended by Mr. Viswanatha Sastri that the four purchases made by the appellant represent nothing more than an investment and if by resale some profit was realized that cannot impress the transaction with the character of an adventure in the nature of trade. The appellant, however, is a firm and it was not a part of its ordinary business to make investment in land. Besides, when the first purchase was made it is difficult to treat it as a matter of investment. The property was a small piece of 28'A cents and it could yield no return whatever to the purchaser. It is clear that this purchase was the first step taken by the appellant in execution of a well-considered plan to acquire open plots near the mills and the whole basis for the plan was to sell the said lands to the mills at a profit. Just as the conduct of the purchaser subsequent to the purchase of a commodity in improving or converting it so as to make it more readily resaleable is a relevant factor in determining the character of the transaction, so would his conduct prior to the purchase be relevant if it shows a design and a purpose. As and when plots adjoining t....
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.... intention to sell them to the mills at a profit and this intention raises a strong presumption in favour of the view taken by the Tribunal In regard to the other relevant facts and circumstances in the case, none of them offsets or rebuts the presumption arising from the initial intention; on the other hand, most of them corroborate the said presumption. We must, therefore, hold that the High Court was right in taking the view that, on the facts and circumstances proved in this case, the transaction in question is an adventure in the nature of trade." "9. The facts of the case of the assessee, as we have already submitted in our earlier submission, are totally different. The judgment in Naidu's case thus is not applicable to assessee's case and does not make any inroad to the contention that there was capital gain. On the contrary if the principles laid down are applied the case supports assessee's contention. 10. Before closing we would like to refer to the judgment in CIT v. Hoick Larsen 160 ITR 67 (SC). In this judgment also the judgment of Naidu's case was referred to. It was held that the real question is not whether the transaction lacks the element of trad....
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....amily and was being planned and sold together, the intention being to gain profit only. The judgment in Naidu's case (supra) was referred to and in fact extract from pg 609 of 35 ITR was quoted in extenso and it was held that the mere fact that there was a series of transaction of sale would not render activity of sale as an adventure in the nature of trade. There was nothing to show that the land was purchased with an intention to sell it at a profit or with requisite intention, to bring it within the parameters of a stock-in-trade. The assessee was not a regular dealer in real estate and the transaction was of capital asset only and not a transaction of any stock-in--trade. (ii) CIT v. R.V. Gupta [2002] 258 ITR 261/124 Taxman 191 (Delhi) In this case assessee a Senior IAS Officer was allotted a plot of land by the DDA jointly with his brother with a stipulation that the allottee(s) should construct a residential house. The assessee constructed six flats and sold four flats retaining remainder two for their own use. The Assessing Officer treated the transaction as adventure in the nature of trade. The High Court referred to the judgment in Naidu's case (supra). It was hel....
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....n 54F of the I.T. Act, 1961. The findings of the Ld. CIT (A) in paras 7 and 7.1 of the order are reproduced as under : "7. I have carefully considered the facts of the case, the reasons given by the Assessing Officer for holding the transaction as adventure in the nature of trade and the submissions made by the appellant. As observed by the Apex Court in Naidu's case (supra) in deciding whether a transaction was an adventure in the nature of trade resulting in profit from business or sale of a capital assets giving rise to capital gains, the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances. On a careful consideration of all the facts and circumstances and the case law on the point, 1 agree with the appellant and hold that it cannot be construed that the transaction was an adventure in the nature of trade, resulting in profit liable to be taxed as income under the head "business", but manifestly was a transaction of sale of a capital asset giving rise to a long term capital gain for the reasons set out here....
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....e of land as business income, it is not understandable why the appellant should treat the same sale as capital gains. The AO's contention does not appear to be correct. There is nothing to show that the land was purchased in joint collaboration with PCL and was owned jointly and collectively by PCL, the appellant, Mr. Mohinder Puri and other related concerns. Para 1(d) of the Agreement of Sale dated 4/4/2005 clearly mentions that each of the land owners is individually the land owner and the extent of area owned by each of the land owner was mentioned therein; each land owner got a separate registration executed, details of which are given in the agreement dated 4/4/2005 itself. The observations of the AO that there was a joint venture amongst the co-owners of land also does not emerge from the reading of the sale agreement. As noted supra a joint venture is in the nature of a partnership where two or more persons join together to carry on business and share profits. There is nothing on record to show that the co-owners entered into a joint venture in the nature of a partnership. Each co-owner purchased the land in his individual capacity and sold it also in the same capac....
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..... In view of the aforesaid judgment of the Rajasthan High Court such feature cannot be construed as rendering the transaction as adventure in the nature of trade in so far as the appellant was concerned. (iii) Another reason given by the AO is that prior to the sale large amount of expenditure was incurred on the development of land. According to the AO the conduct of improving or converting the land so as to make it more readily saleable shows a design and a purpose meaning that it was the intention of the assessee to hold the land not as an investment but as a trading asset. It is true that expenditure was incurred prior to the sale which has been shown towards land development expenditure. This, however, cannot be taken as converting a land, which was held by the appellant as a capital asset, into a trading asset. Way back in Jankiram Bahadur Ram v. CIT 57 ITR 21 SC, it was held that the mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade. In the case of CIT v. Kasturi Estates Pvt. Ltd, 62 ITR 578 (Mad.) the assessee had even parceled the land into plots and ....
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.... * No organized effort was undertaken to attract purchasers. * The circumstances shows that the appellant wanted to realize the proceeds to invest in a residential house, which was done and benefit u/s. 54F was sought. * Appellant never dealt in the trading of land. * The land was shown as an investment and not as stock-in-trade. 7.1 For the reasons stated above it is held that the sale of land was sale of capital asset and the profit was in the nature of capital gain. The AO is directed to compute the capital gain and also allow the benefit of Section 54F of the Act." 6. The Revenue on ground Nos. 1 and 2 challenged these findings of the Ld. CIT (A). The Ld. D.R. relied upon the order of the A.O. He has submitted that land was partially owned by PCL. It was a solitary transaction of the assessee. PCL is in business of land deals and major share belongs to the assessee and PCL. The assessee is in joint business collaboration with the PCL, in which, assessee is a Director. PCL held the land as stock-in-trade. The sale consideration was taken in common kitty account. Sale consideration was received by PCL for all the co-owners and later on, it ....
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....income and income from other sources, which have been accepted by the Department. Therefore, assessee was not involved in any trading activity to deal in land. He has submitted that land was acquired in the year 1995-1997 which was 1.31 acres only. The intention of the assessee at the time of purchase of the land was only to be seen which in the case of the assessee was clearly an investment. The burden was upon Department to show that it was a business activity of the assessee. No money have been borrowed by the assessee for any business purposes. There is no frequency of transactions carried on by the assessee for sale of land. It was only one transaction conducted by the assessee. The assessee has shown the capital asset as an investment only. The sale consideration was invested in purchase of residential plot in Palem Springs in Gurgaon. The assessee expended as development expenses in 9% of the sale price only. He has relied upon the decision of the Hon'ble Supreme Court in the case of Jankiram Bahadur Ram v. CIT [1965] 57 ITR 21 and CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad.), which is accepted by the Department by not filing SLP before the Hon'ble Supreme Court....
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....-trade, does not prove that assessee also held the property as stock-in-trade. The assessee did not make any effort to attract the purchasers, such as opening of an Office or to make Advertisement to show his intention to deal in property. The motive of the assessee right from the very beginning with respect to acquisition of the property was, to realise the profit on appreciation in its value and never had any intention to indulge in trading activity. The A.O. raised several objections in the assessment order to reject the claim of assessee, which have been met by the assessee before Ld. CIT (A) in his submissions. The assessee in his reply before the Ld. CIT (A) specifically pleaded that land was held individually by all the owners. Merely because the land has been sold under a Common Agreement to Sell for the sake of convenience, would not, make the transaction as Joint Venture. Each land owner had received sale consideration from PCL. It was also alleged by the A.O. that prior to it, assessee had agreements with some other parties, but such agreements were never acted upon between the parties. PCL has substantial land holding as against land holding of the assessee. The assesse....
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....t expenses were incurred by PCL for entire subject land. The expenses of Rs. 77,04,873/- were incurred on behalf of the assessee through PCL which were recovered by PCL from the assessee proportionately on the basis of land holding ratio. The A.O. referred to the assessment order in the case of PCL for A.Y. 2006-2007, in which, the land development expenses were held to be bogus. Therefore, A.O. disallowed the deduction of the above amounts. The Ld. CIT (A) noted that in the case of PCL for A.Y. 2006-2007, he has deleted the addition. Therefore, A.O. was directed to allow necessary deduction in favour of assessee while computing the capital gains as per law. 12. After considering the rival submissions, we do not find any merit in this ground of appeal of the Revenue. The A.O. merely relied upon assessment order in the case of PCL, in which, it was held that development expenditure were bogus. Since in the case of PCL addition have been deleted, therefore, there were no justification to sustain the addition. Further, A.O. has not given any independent findings for the purpose of making disallowance against the assessee. Therefore, Ld. CIT (A), correctly allowed this ground in fav....