TaxTMI 
TaxTMI 
2022 (10) TMI 1159
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....erm capital gain", and c. Challenging the order of CIT(A) upholding the action of the Assesse coffering business income by applying "project completion method" instead of "percentage completion method." Facts of the Case: 2. The undisputed facts relevant to the aforesaid grounds as available in the assessment order and the CIT(A) order are that, the Assessee is a partnership firm engaged in the development of real estate into residential and commercial complex. The Assessee had purchased a land at Mihan, Nagpur for a total consideration of Rs. 25 crores vide Sale Deed dated 31.12.2007. Prior to execution of the said Sale Deed, the Assessee had entered into an Memorandum of Understanding ("MOU") dated 14.07.2006 with M/s. Commercial Explosives (India Ltd.), the Original Vendor along with which an advance amount of Rs.5.00 crores was paid. A copy of the said MOU appears at Page pages 27 to 33 of PB. 3. As per the prior Resolution dated 01.06.2006 passed by the Assessee appearing at page 227of PB, the said land was acquired for the purpose of development of a project which it proposed to lease out for earning rental income. However, due to various impediments the sai....
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....ition. The Revenue is in appeal before us challenging the said order of the CIT (A). Business Income Vs. Capital Gain: 7. The first ground of the Revenue is that the sale of land at Nagpur by the Assessee is a transaction in the nature of adventure in trade and hence, liable to be taxed under the head "Income from Business and Profession" and not under the head "Capital Gain" as offered by the Assessee. The reasons provided by the AO in his assessment order are summarised hereunder: a. The said land was shown as "Stock in trade" in the balance sheet of the Assessee; b. The Assessee is engaged in the business of development of real estate and without land no development can start. Hence, the argument of Assessee that it is not dealing in buying and selling of land is incorrect; c. As per partnership deed, the Assessee is in the business of developing real estate (Copy of Partnership Deed is at Page 208 211 of PB). d. Intention at the time of acquisition of land is more important than subsequent non utilization of said land, e. The Assessee was aware of the various problems and difficulties which lay ahead and hence, it cannot be acc....
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....connected with his business or profession........." Therefore, even if the land is purchased for the purpose of business (and it is not to be traded in) then it will be capital asset. The expression "stock-in-trade" as referred to in section 2(14) per force implies the existence of a business. In this case, though the Assessee was in the real estate development business, the development of the said land in question could not commence due to litigation and procedural difficulties. Hence, the Assessee had to sell the said land as such without starting the development activity, the purpose for which it was acquired having failed. e. The simplest method of determining whether an item of property is "stock-in-trade" or a "capital asset is by applying the functional test. If the property is an item which is "traded" by the assessee, it would be "stock-in-trade" but if the property constitutes the 'means' through which he carries on his business, the same cannot be his "stock-in-trade" and hence, by default, it would constitute his "capital asset" Reliance is placed on the decision of Hon'ble Gujarat High Court in the case of H Mohmed & Co v. CIT (1977) 107 ITR 637(Gu....
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....r A.Y. 2004 05 upheld the gain on sale of land as taxable under the head "Capital Gain". Therefore, the decision of AY 2004-05 in Rajesh Builders case which has attained finality may kindly be followed in view of rule of precedence has laid down by Mumbai High Court in the case of Bank of Baroda vs. HC Shrivastava (2002) 256 ITR 385 (Bom.) I. It is important to mention that the Assessee did not deal in past or in subsequent years and is a solitary transaction of the purchase and sale of land. 9. The CIT(A) has in Para 6.2 from page nos. 7- 22, summarised the arguments of the Assessee and thereafter, allowed the claim of the Assessee as per reasoning provided in para 6.5 of the appeal order being impugned before us which are stated hereunder: a. The provisions of section 2(14) of the Act defines the term "capital asset". It states that property "whether connected to business or not" is "capital asset". Hence, even if an asset is connected to business, the gain on the sale is "capital gain". Even section 50 of the Income Tax Act lay down that the gain on the sale of depreciable asset used for the purpose of business is to be taxed under the head "capital gain" Th....
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....ed upon the ITAT decision in the case of Rajesh Builders for A.Y. 2005-06 wherein the hon'ble ITAT has held that the gain on sale of development rights is taxable as business income and not capital gain. On the other hand, the Assessee has produced the decision of hon'ble ITAT in the same case for A.Y. 2004-05 wherein the hon'ble ITAT has held that even in the case of real estate developer, the land acquired for the purpose of development shall be capital asset, if it is sold without development and the gain on such sale is taxable as "capital gain". In fact, the said decision of the jurisdictional ITAT is on all fours with the facts of the Assessee's case. 10. Before us, the ld. DR challenged the action of the CIT(A) and relied on the order of the AO. He reiterated what is stated by the AO in the order. His main contention is that since the Assessee is a real estate developer, any purchase and sale of land is a business. transaction and hence, liable to be taxed under the head business income. 11. In her counter the Ld AR for the Assessee submitted that a businessman can have same asset as a "trading asset" and also as an "investment" The Id AR further submit....
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....s for houses and commercial buildings". 12. She further took us through the CIT(A) order wherein the decision of Pune ITAT in the case of Shanti Builders vs JCIT (Pune) (2004) 88 TTJ 519 is mentioned holding that even if the land was acquired for the purpose of development and because of its sterilization it cannot be developed, the gain on sale has to be treated as capital gain and not as business income. The Pune ITAT held a under: "At the outset, we are not impressed by the arguments of the learned commissioner in the impugned order as well as of the learned Departmental Representative during the course of hearing before us that the Assesse being a firm the income was required to be brought to tax under the head "Profits and gains of business or profession" and not under the head "capital gains". The thrust of the arguments in this respect is that the firm is essentially constituted to carry on business and, therefore, any asset acquired by the firm cannot be anything but business assets. This argument overlooks the basic fact that business asset held by a firm can be in the form of a capital asset as well. For example, if a firm acquires plant and machinery for the ....
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....parate portfolios, one as a "trading portfolio" and another for "holding investments" 16. Thus, when we look at all attendant facts which remain undisputed that: a. the land was purchased with the intention of development for the purpose of leasing out constructed area and not sale of land, b. the land could not be developed due to various impediments as listed by the AO and CIT(A) in their order, c. the land was purchased by the Assessee with its own funds and not borrowed funds, d. the land sale is an isolated transaction, e. the land was classified as "investment" in the books of accounts as on 01.04.2010 which is accepted by the AO. Thus, we do not find any reason to differ from the view taken by the CIT(A). The assessee has used its capital to purchase the said land and what is recovered is the said capital. The transaction cannot be treated to be an adventure in the nature of trade since the transaction of sale was forced upon the assessee due to circumstances which are enlisted hereinabove. This transaction cannot be classified as an adventure in the nature of trade. It was not a transaction which was actively intended at th....
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..... 21. In her counter, the ld. AR countered each of these cases giving reference to the facts of the present case. The ld AR argued that these decisions are not applicable for determining the period of holding an asset under the Income Tax Act. She stated that section 2(42A) which defines the term "Short term capital asset" uses the phrase "held" and not "owned" or "purchased" She further stated that the valuable and enforceable rights of the Assessee got created when MOU was executed on 14.07.2006 in pursuance to a Resolution passed by the Board of the Original Vendor. She drew our attention to copy of the said resolution appearing on page 34 of the PB. She further showed that part payment of Rs.5.00 crores was made. She argued that the said MOU created an enforceable right of the Assessee and hence, it's a "property" as covered in the definition of Capital Asset u/s. 2(14) of the Act and hence, the date of acquisition would be the date of MOU She relied upon the decision of SC in the case of Sanjeev Lal [2014] 306 ITR389 (SC) for this proposition. 22. She further relied upon para no.8.3 on pages 33 onwards of the CIT(A)'s order where the clear undisputed findings of ....
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....ant gain was assessed as short term capital gain. 4. Being aggrieved, assessee filed appeal before Ld. CIT(A) and made detailed submissions to argue the point that the impugned property was held for more than 36 months as per law, therefore, it should be held as 'long term capital asset' Ld. CIT(A) did not agree with the submissions of the assessee and confirmed the action of the AO. Still being aggrieved, assessee filed appeal before the Tribunal 5. During the course of hearing, the Ld Counsel of the assessee made detailed arguments. Twofold arguments were made by him before us. It was firstly argued that period of holding should be computed from the date of allotment of the property as per section 2(42A). In support of his claim, reliance was placed on the following judgments: 1. Madhu Kaul v. CIT (2014) 363 ITR 54 (P&H HC) 2 CIT v. K Ramakrishnan (2014) 363 ITR 59 (Del HC) 3. CIT v. SR Jeyashankar (2015) 373 ITR120 9Mad HC) 4. CIT v. A Suresh Rao (2014) 223 Taxmann 228 (Kar HC) 5. Vinod Kumar Jain v. CIT (2012) 344 ITR 501 (P&H_HC) 6. CIT v. Jitendra Mohan (2007) 165 Taxman 524 (Del HC) 7 CI....
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.... immediately preceding the date of its transfer": Perusal of aforesaid definition shows that the legislature has used the expression 'held' It is further noted by us that in various other allied or similar sections, the legislature has preferred to use the expression acquired' or 'purchased' e.g. in section 54/ 54F Thus, it shows that the legislature was conscious while making use of this expression. The expressions like 'owned' has not been used for the purpose of determining the nature of asset as short term capital asset or long term capital asset. Thus, the intention of the legislature is clear that for the purpose of determining the nature of capital gain, the legislature was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis. The legislature was apparently not concerned with absolute legal ownership of the asset for determining the holding period. Thus, we have to ascertain the point of time from which it can be said that assessee started holding the asset on de facto basis. 10. It is noted that the letter of allotment was issued to the assesse on 11-04-2005, the ....
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....privileges of ownership without transfer of title in the building and are common mode of acquiring flats particularly in multi storied constructions in big cities. The aforesaid new sub clauses (v) and (vi) have been inserted in Section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. A person holding the Power of Attorney is authorized the powers of owner, including that of making construction though the legal ownership in such cases continues to be with the transferor. The intention of legislature is to treat even such transactions as transfers and the capital gain arising out of such transactions are brought to tax. Further, the Circular No.471 goes to the extent of clarifying that for the purpose of Income-tax Act, the allottee gets title to the property on the issuance of the allotment letter and the payment of installments is only a follow up action and taking the delivery of possession is only a formality. In case of construction agreements, the tentative cost of construction is already determined and the agreement provides for payment of cost of construction in instalments subject to the condition that ....
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....it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him. 11. Similarly, in the case of Madhu Kaul (supra), the Hon'ble Punjab & Haryana High Court analysed various circulars and provisions of the Act that on allotment of flat and making first installment the assessee was conferred with a right to hold a flat which was later identified and possession delivered on later date. The mere fact that possession was delivered later, would not detract from the fact that assessee (allottee) was conferred a right to hold the property on issuance of an allotment letter. The payment of balance amount and delivery of possession are consequential acts that relate back to and arise from the rights conferred by the allotment letter upon the assessee. ... 13. In the case of Vinod Kumar Jain vs CIT 344 ITR 501 it was held by Hon'ble Punjab & Haryana High Court that conjoined reading of section 2(14), 2(29A) and 2(42A) clarifies that holding period of the assessee starts from the date of issuance of allotment letter. Since allottee gets ....
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....cussed above at length, we find that holding period should be computed from the date of issue of allotment letter If we do so, the holding period becomes more than 36 months and consequently, the property sold by the assessee would be long term capital asset in the hands of the assessee and the gain on sale of the same would be taxable in the hands of the assessee as Long Term Capital Gain We direct accordingly." 25. A similar view has been taken by the Karnataka High Court in the case of CIT vs. A. Suresh Rao [2014] 41 taxmann.com 475 (Karnataka) as under: The definition as contained in section 2(42A) though uses the words, 'a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer, for the purpose of holding an asset, it is not necessary that, he should be the owner of the asset, with a registered deed of conveyance conferring title on him. In the light of the expanded definition as contained in section 2(47), even when a sale, exchange, or relinquishment or extinguishment of any right, under a transaction the assessee is put in possession of an immovable property or he retained the same in part performa....
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....ssee, yet a company operates through resolutions and hence, the date when the AGM resolution was passed, the contract became binding on the Vendor Company giving unfettered rights to the Assessee here to purchase the property. Hence, we direct the AO to take the said date of resolution being 24.09.2007 as the date of when the property can be said to be held by the Assessee for the purpose of section 2(42A) of the Act and compute the long term capital gain accordingly. To that extent, the order of the CIT(A) stands modified. This ground is partly allowed. Project Completion Method Vs Percentage Completion Method 29. The Assessee is a real estate developer engaged in the business of developing housing projects in and around Navi Mumbai The Assessee filed its return of income for AY 2011-12 interalia declaring income under the "project completion method for its project named "Amarante" at Kalaomboli, Navi Mumbai which had commenced on 09.03.2010. During the course of assessment, the AO rejected the "project completion method" followed by the Assessee and substituted the said method with "percentage completion method" thereby, making an addition of Rs.2,08,36,527/-. 30. Bef....