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Income Tax Appellate Tribunal, Mumbai “A” Bench, Mumbai.
Before: Shri B.R. Baskaran (AM) & Shri Sandeep Singh Karhail (JM)
The assessee has filed this appeal challenging the order dated 30.12.2022 passed by the learned CIT(A), National Faceless Appeal Centre, Delhi and it relates to A.Y. 2013-14. The assessee is aggrieved by the decision of the learned CIT(A) in confirming the assessment of profit arising out of transfer of rights over a land as ‘business income’ as against assessee’s claim of ‘long term capital gains’.
The facts relating to the issue are stated in brief. The assessee is engaged in the construction business. It filed its return of income for the year under consideration declaring a total income of Rs. 20.94 lakhs. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee has received a sum of Rs. 8,18,31,600/- in respect of transfer right
2 Abhishek Shelters Ltd. in a land. After deducting a cost incurred by the assessee in respect of the above said land amounting to Rs.66,50,000/-, the Assessing Officer assessed net profit of Rs. 7,50,81,600/- as business income of the assessee.
Facts relating to the above said sale of land are stated in brief. The assessee had entered into a Development agreement on 3.7.2008 with the members of Dhonde family for development of the land belonging to them. At that time, the assessee was a partnership firm, which was later converted into limited company. The said land was an agricultural land and due to restriction imposed in a Local Act, the said agricultural land could not be transferred to the name of the assessee company, because of its status as agricultural land. Hence the assessee entered into Development agreement and also obtained irrecoverable power of attorney in its favour. The assessee had also paid consideration. The intention of the assessee was to develop the land and construct building thereon. However, the above said activity could be carried out only if the status of the land is converted into non- agricultural land. As per the agreement entered between, it was the responsibility of the Dhonde Family to do the conversion of land. In the meantime, a dispute developed between the land owners, i.e. two legal heirs of deceased co-owners became major and started objecting to the land deal. Hence the deal could not be completed by the assessee. Despite passing of three years, the dispute could not be dissolved. Hence, the assessee decided to pull out from the deal. The owners of land sold the agricultural land to some other person and the assessee became a confirming party in that sale transaction. The assessee received a sum of Rs.8.18 crores as compensation for transfer of its right over the land. The assessee initially did not offer the above said profit for income tax. However, during the course of assessment proceedings, the assessee admitted the income and accordingly requested the Assessing Officer to assess the profit as long term capital gain by giving indexation benefit. The Assessing Officer, however, took the view that it is assessable as business income and accordingly assessed the same as 3 Abhishek Shelters Ltd.
business income of the assessee. The learned CIT(A) also confirmed the same.
The Ld A.R submitted that the tax authorities have taken the view that the impugned transaction is part of business activities of the assessee. He submitted that the business activity of the assessee is construction and sale of flats and not trading in lands. He submitted that it is true that the assessee had paid consideration for purchase of agricultural land with the intention to develop the said agricultural land. But the said business intention could not be implemented, pending conversion of agricultural land into non-agricultural land. By making the said payment, the assessee has acquired rights over the land, even though the land was not transferred to the name of the assessee and hence the said right shall constitute capital asset in its hand, pending conversion, i.e., the assessee could not implement its intention of developing the land by putting up construction thereon until and unless the status of the land is converted into “non-agricultural land”, meaning thereby, it cannot acquire the character of “stock-in trade of the assessee till the date of conversion. He submitted that, as per the agreement entered by the assessee with the land owners, the responsibility to get the status of the land converted into “non-agricultural” land was placed upon the land owners. However, they could not get the work of conversion done and hence the status of land remained as agricultural land. Further, disputes arose between the land owners and consequently with the assessee also. Hence the assessee could never implement the purpose for which the land was proposed to be acquired. Ultimately, the land was sold by the owners to some other person and the assessee became confirming party, for which it received consideration for releasing its rights.
The Ld A.R submitted that the assessee has always shown the payment made for the land as “current asset” only, i.e., it did not show it as “stock in trade” in its books of accounts. He submitted that till the time the land
4 Abhishek Shelters Ltd. owners convert the land into “Non Agricultural”, the land would remain as capital asset only in the hands of the assessee. Accordingly, he submitted that the rights acquired by the assessee over the land remained as Capital asset only in the hands of the assessee. Accordingly, the Ld A.R contended that the gains arising to the assessee on transfer of the rights in the land should be assessed as capital gains. He submitted that the Hon’ble Supreme Court has held in the case of CIT vs. Glowshine Builders & Developers P ltd (150 taxmann.com 111)(SC) as under:- “….Merely on the basis of recording of the inventory in the books of accounts, the transactions in question would not become stock in trade. As per the settled position of law in order to examine whether a particular transaction is sale of capital assets or business expenses, multiple factors like frequency of trade, volume of trade, nature of transaction over the years etc., are required to be examined. … Accordingly, the Ld A.R contended that the right acquired by the assessee in the agricultural land is Capital asset and hence the profit arising on transfer of the same is assessable as Long term Capital gain after deducting indexed cost of acquisition from the sale consideration.
The ld D.R, on the contrary, submitted that the intention of the assessee in acquiring right in the land was to develop the same. The Development agreement entered with the land owners gave exclusive right to the assessee to develop the land. Hence the right acquired by the assessee over the land shall constitute business right only. Accordingly, the ld D.R submitted that there is no reason to interfere with the decision rendered by Ld CIT(A).
We heard rival contentions and perused the record. We noticed that the assessee is engaged in the business of construction of apartments. Accordingly, the tax authorities have taken the view that the transaction under consideration was a business transaction. We noticed earlier that the Hon’ble Supreme Court has held in the case of Glowshine Builders & Developers P Ltd (supra) that in order to examine whether a particular
5 Abhishek Shelters Ltd. transaction is sale of capital assets or business expenses, multiple factors like frequency of trade, volume of trade, nature of transaction over the years etc., are required to be examined. Hence, merely because the assessee is engaged in the construction business, it cannot be said that all the transactions of purchase of land or rights in land would automatically fall under the category of business transactions.
The moot question here is regarding the character of the right acquired by the assessee over the land, i.e., whether it is a capital asset or business asset?. The contention of the assessee is that the assessee could not implement its intention to do the business till the time the land is converted into non-agricultural land and hence till that time, it shall constitute Capital asset in its hands. We notice that an identical dispute arose before Delhi bench of Tribunal in the case of AJB Developers P Ltd (ITA No.7386/Del/2018 dated 27-05-2019. We may gainfully refer to that decision. In the above said case, the assessee before the Delhi bench of Tribunal sold a land, which it had held as stock in trade and claimed the same as Capital gains. The claim of the assessee was rejected by the assessing officer. The main contention of the assessee was that it could not carry on the business of construction, since no construction was permissible as per a Notification issued by Ministry of Defence, Government of India and therefore, the character of the land remained as capital asset. It is also pertinent to note that the assessee had shown the asset as ‘stock in trade’ only in its books of accounts. The Tribunal, in the above said case, held that the asset, though shown as stock in trade in books, shall acquire the character of Capital asset, as the assessee cannot carry on business thereon. The relevant discussions made by the Tribunal are extracted below:-
“6. We have considered the rival submissions. It is not in dispute that assessee company is engaged in business of builders, Colonizers, estates developers, town planner, architects, engineers, electrical, civil and maintenance contractors and infrastructure development. The assessee procured the land in question at Vallah and Verka, Amritsar in F.Y. 2006-
6 Abhishek Shelters Ltd.
2007/2007-2008. The assessee entered into MOU with AHCL, through which, it intended to and agreed to transfer its rights, title and interest in the aforesaid land to AHCL for an agreed consideration. However, in July, 2008, FIR was lodged at Vallah and Verka Police Station by Army seeking demolition of the structure already built in view of Ministry of Defence Notification Dated 11.11.2004. Thus, AHCL refused to honour further demand as per MOU Dated December, 2006. The assessee filed copy of the Notification dated 11.11.2004. The same reads as under :
"In exercise of powers conferred by Section 3 of the Works of Defence Act, 1903 (& of 1903), the Central Government hereby declares that it is necessary to impose the restrictions specified in clause (b) of Section 7 of the said Act upon the use and enjoyment of the land described in the Schedule below, being land lying in the vicinity of Valla Ammunition Dump, District Amritsar in the State of Punjab, in order that the said land may be kept free from buildings and other obstructions from the date of publication of this notification.
2. A sketch plan, of the land may be inspected in the office of Deputy Commissioner, Amritsar, in the State of Punjab.
SCHEDULE All the land comprised in the area lying within the distance of one thousand yards from the crest of the outer parapet of the works of defence, namely, Valla Ammunition Dump, District Amritsar in the State of Punjab."
6.1. The lands of the assessee admittedly falls within the distance of the above Notification and as such, assessee shall have to keep the land free from building and other constructions from the date of publication of this Notification. This Notification was in force when assessee procured the impugned land and as such, assessee was bound by the Notification of Ministry of Defence. No business activity thus could have been carried out in the impugned land. The assessee could not have carried out any construction or business activity as a Builder or Colonizers. The AHCL refused to make any further payment and obtained injunction from the Hon'ble Delhi High Court through which assessee was restrained from disposing of the movable/immovable assets of the company vide Order dated 03.07.2009. Thus, in view of the above Notification of the Ministry of Defence and Judgment of Hon'ble Delhi High Court, assessee could not have done any activity in the impugned land for any business purposes. Learned Counsel for the Assessee has also filed the details at pages 38 and 39 of the PB to show that because of the above circumstances, the assessee earned agricultural income through the impugned lands. It would strengthen the submission of the assessee that impugned land was never intended for any business purposes because of the above restrictions noted above. In these circumstances, the question that has to be considered is, Whether book entries made in the books of account of the assessee showing the impugned land as stock in trade would be relevant ? or Whether it was rightly considered by the assessee as capital
7 Abhishek Shelters Ltd. asset ? It is well settled Law that book entries are not determinative of income of assessee. When the question is, Whether receipt of money is taxable or not, or Whether certain deductions from that receipts are permissible in Law or not, the question has to be decided according to principles of Law and not in accordance with the Accounting Practice. It is also well settled Law that income tax does not recognize hypothetical or notional income which is not received or accrued to the assessee. We rely upon the Judgments of Hon'ble Supreme Court in the case of Sutlez Cotton Mills Ltd., vs. Commissioner of Income Tax, West Bengal (1979) 116 ITR 1 (SC), in which it was held as under:
"It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."
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6.4. Considering the facts of the case in the light of above decisions, it is clear that even if assessee company has shown the impugned land as stock in trade in the books of account, but, there was a complete bar on assessee as per the Notification of the Ministry of Defence (supra) to raise any construction therein and as such assessee could not have done any business activity on the aforesaid land in question. Therefore, merely because impugned land have been shown as stock in trade in the books of account would not be relevant. Its true character appears to be of capital asset in nature and in case it is transferred subsequently, only capital gain/loss shall have to be computed in accordance with Law. The land was acquired in F.Y. 2006- 2007/2007-2008 No business activity have been shown to have been done by assessee on property in question. No construction is carried out in the impugned land.
6.5. The Hon'ble Delhi High Court in the case of DLF Housing and Construction Pvt. Ltd., vs. CIT 141 ITR 806 (Del.) held as under :
"These observations, in our opinion, are quite apposite in the instant case inasmuch as it is beyond the pale of controversy that the assessee took no steps to develop the land in question and carve out plots as sites for houses, etc. On the contrary, the farm account of the assessee shows that substantial amounts were spent on the agricultural farm and income there from was also received. It may be that the layout plan for West Rajouri Garden which had been submitted by the assessee earlier to the DDPA for sanction was not approved and the assessee realised that there was no prospect whatsoever of the scheme in question being sanctioned. All
8 Abhishek Shelters Ltd. the same the fact remains that no step was taken towards development of the land in dispute and it retained its agricultural nature even at the time of its acquisition by the Government. This is a vital circumstance which cannot be lost sight of for determining whether profits are assessable as those arising out of a venture in the nature of a trade or it was merely appreciation of the capital investment. "A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock- in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business ; in each case the question is one of intention to be gathered from the evidence of conduct by the acquirer and his dealings with the commodity"-- (CIT vs. Madan Gopal Radhey Lal [1969] 73 ITR 653 (SC). Even the fact and circumstance that the entry with respect to the excess amount received by the assessee by way of compensation has been shown under the head "Stock-in-trade" will have no effect to negative its being a capital receipt by sale of agricultural land. Agricultural income does not loss right to exemption merely because it can be brought under one or other of the heads of the income set out in section 6 of the Act. It is nobody's case that purchase and sale of agricultural land as such was the business or one of the trading activities of the assessee. Indeed, the fact that agricultural operations were being carried on in the land in question throughout would warrant the inference that it was yielding Income and, as such, it was being dealt with as a capital Investment. Capital is the source of income and income is the fruit of capital, Judging from this aspect also, it is difficult to hold that the lands in question partook of the nature of stock-in-trade."
6.6. The assessee, therefore, rightly contended that findings of the A.O. is incorrect because the capital asset was acquired way back in F.Y. 2006- 2007 which is accepted by the A.O, as such, on date of sale period of holding would be beyond 36 months. Therefore, benefit of indexation should be allowed as the asset was acquired way back in F.Y. 2006-2007. Considering the facts and circumstances of the case, it is clear that impugned land remain as capital asset because of the peculiar facts and circumstances of the case noted above as per Notification of the Ministry of Defence (supra). Therefore, on account of transfer of the same to AHCL by way of Settlement of the Dispute in the Hon'ble Delhi High Court, the assessee correctly offered the same as long term capital gains/loss as per Law. The Orders of the authorities below thus are not sustainable in law.”
In the instant case, we noticed earlier that the assessee has acquired right in an agricultural land by entering into a Development Agreement by paying part consideration and obtaining possession. The said transaction is in accordance with the provisions of sec.53A of the Transfer of Property Act
9 Abhishek Shelters Ltd. and the assessee shall be considered as owner. However, it could not carry on its construction activities thereon, since the land owners have not converted the agricultural land into “non-agricultural land”. Hence there was disability upon the assessee to carry on its business activities on the land. Hence it was held as Capital asset only by the assessee as opined by Delhi bench of ITAT in the case of AJB Developers P Ltd (supra). In the case before the Delhi Tribunal, the assessee before it purchased a land and treated the same as ‘stock in trade’. But due to a notification issued by the Ministry of Defence, the assessee could not carry on its business activities thereon. The Tribunal, in the facts of the above said case, held that the land acquired by the assessee was Capital asset.
In the case of DLF Housing and Construction P Ltd (supra) held that there is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct by the acquirer and his dealings with the commodity"-- (CIT vs. Madan Gopal Radhey Lal [1969] 73 ITR 653 (SC). In the case before Hon’ble Delhi High Court, though the assessee purchased an agricultural land for selling it after plotting the same and accordingly treated it as its stock in trade, yet it continued agricultural operations thereon. It also declared agricultural income therefrom. The Hon’ble Delhi High Court noticed that it was not the business of the said assessee to purchase and sell agricultural land. Though the land was purchased for trading purposes, yet it retained it as its capital asset by carrying on agricultural operation on the land. Under these set of facts, the Hon’ble Delhi High Court held that the agricultural land was held by the assessee as Capital asset only and not as stock in trade.
In our considered view, both the above said decisions support the claim of the assessee that it has held the rights over the land as its capital asset only, as it could not have carried on business activities till the time it is converted into non-agricultural land, which did not happen. Accordingly, we
10 Abhishek Shelters Ltd. are of the view that, in the facts and circumstances of the case, there is merit in the contentions of the assessee that the right in agricultural land was held by the assessee as Capital asset only. There is no dispute that the said capital asset was held for more than three years. Accordingly, the gain arising on its transfer is assessable as long term capital gain with indexation benefit. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to assess the profit as long term capital gain and allow indexation benefit on the cost incurred by the assessee. We order accordingly.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in on 17.8.2023.