MANI SHANKAR PANDEY,VARANASI vs. INCOME TAX OFFICER, RANGE 2 (2), VARANASI

IN THE INCOME TAX APPELLATE TRIBUNAL VARANASI BENCH, VARANASI BEFORE HON’BLE JUSTICE (RETD.) C.V. BHADANG, PRESIDENT AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER ITA No.222/VNS/2024 A.Y.-2015-16 Mani Shankar Pandey, vs. Income Tax Officer-Range B. 21/117, B.21/117-18, Mahabir 2(2), Varanasi Colony, Kammacha, Varanasi, U.P. PAN: AJDPP5732G (Appellant) (Respondent) Assessee by: Sh. Atul Agrawal, C.A. Revenue by: Sh. Deepak Yadav, Sr. DR Date of hearing: 03.08.2026 Date of pronouncement: 05.10.2026 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the assessee against the order of the ld. CIT(A), NFAC dated 30.10.2024, wherein the ld. CIT(A) has dismissed the appeal of the assessee that were filed against the order of the ld. Assessing Officer under section143(3) for the assessment year 2015-16 dated 22.12.2017. The grounds of appeal are as under:- “1. Because, the learned CIT (Appeals) has failed to consider the fact that the assessee is not a businessman but a retired Member of Legislative Council and his regular source of earning is from Pension, Rent and Interest from Bank. 2. Because, the learned CIT (Appeals) have failed to appreciate the fact that the property developed by the assessee on land purchased in 1995-1996 is the single activity during his life span 67 years and therefore has grossly erred in confirming the income from sale of flat as Business Income and not Capital Gain. 3. Because, the learned CIT (Appeals) has failed to consider the fact that the assessee has not sold all the flats constructed by him but has kept some flats for himself and his family members.

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 4. Because, the learned CIT (Appeals) has wrongly interpreted various judicial pronouncements wherein profit from similar activity has been treated as capital gain rather than as profit arising from an adventure in nature of trade. 5. Because, the learned CIT (Appeals) has failed to consider that fact that the assessee has not converted his capital asset to stock in trade. 6. Because, without prejudice and in any view of the matter, the learned CIT (Appeals) has failed to consider the fact that the business profit worked out by the learned AO is incorrect and against the principals laid down in section 45(2) of the Income Tax Act. 7. Because the learned CIT (Appeals) has erred in overlooking and in summarily rejecting the statement of facts and detailed Submissions in Brief filed before him while accepting incorrect version of the learned Assessing Officer. 8. The assessee craves leave to add/ alter any of the grounds of appeal before or at the time of hearing.”

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 done by taking housing loan, loan against fixed deposits and advances received from customers. On this account, he asked the assessee to show cause as to why the construction and retail sale of flats should not be considered as income from business rather than capital gains. In response to the assessee, the assessee submitted the details of investment, giving the breakup of housing loan and the receipts from various purchases. The ld. Assessing Officer concluded from the same that the assessee was actually indulging in an adventure in the nature of trade and he asked the assessee to once again show cause why the income should not be assessed under business and profession by denying the claimed deduction under section 54. In response, it was submitted that the receipts had been shown as capital gain in consideration of various Court judgments. In the case of CIT vs. Shashi Kumar Agarwal (2003) 131 Taxman 823 (All), the Hon’ble Allahabad High Court had held that profit on sale of land after plotting to secure better prices, was capital gain. Similarly, the Hon’ble Rajasthan High Court had held that in the case of CIT vs. Sohan Khan & Mohan Khan (2008) 304 ITR 194 (Rajasthan HC) that whether the transactions gave rise to capital gain or not would be based on the regularity of purchase and sale. In the case of the assessee, the property developed by him on land purchased in 1995-96 was the single activity during his life span of 67 years. The Hon’ble High Court had also noticed that there was nothing to show that the land was purchased with clear intention to sell at a profit and similarly, the assessee purchased the land in 1995-96 with the clear intention of not holding it as a stock in trade. In the said case, the Hon’ble High Court had also stated in the case that the assessee was not a regular dealer in real estate and neither was the assessee. In view of the above decided cases and considering the facts of the case, the assessee submitted that the profit on the sale of flats should be considered as capital gains only. However, the ld. 3

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 Assessing Officer was not convinced with the submissions made by the assessee. He pointed out that the facts of the cases cited by the assessee did not align with the facts of the assessee’s case. He pointed out that the assessee had constructed 12 flats that could not have been constructed for his own usage. Further, the assessee had, even before starting the construction of the flats, taken advances from various purchasers. This activity was similar to that of a builder who constructed flats on the basis of advances received from customers. It was, therefore, clear that the assessee was indulging in adventure in the nature of trade and was therefore, not eligible for any set off of under section 54 of the Income Tax Act. Accordingly, he computed the profit of the assessee from the sale of the said plot at Rs. 55,70,829/- and brought the same to tax under the head income from business and profession. Penalty proceedings under section 271(1)(c) was also initiated. 3. Aggrieved with the said assessment order, the assessee filed an appeal before the ld. CIT(A). Before the ld. CIT(A), it was submitted that the assessee was not a businessman but a retired Member of Legislative Council and his regular source of earning was from pension, rent and interest from bank. The assessee was also not a regular dealer in real estate. He had purchased land way back in the year 1995-96. It was a single activity and he had placed reliance on the judicial pronouncements which held such activity to be in the nature of capital transactions yielding capital assets. Furthermore, it was pointed out that the case had been selected for limited scrutiny for the purposes of verifying the deduction of Rs. 51,64,111/- claimed by the assessee under section 54 of the Income Tax Act and the ld. Assessing Officer had no jurisdiction to enquire into the nature of income the limited scrutiny, without obtaining the approval of the competent authority. It was also argued that vide order-sheet entry dated 4

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 12.05.2017, the returned income offered by the assessee had been accepted by the predecessor of the present Assessing Officer and therefore, the ld. Assessing Officer should not have ignored the same. These submissions were contained in the form of statement of facts and grounds of appeal that were filed before the ld. CIT(A). The ld. CIT(A) noted that the assessee had been afforded four opportunities to furnish submissions during the course of appeal and the assessee had availed three of these opportunities. He reproduced the assessment order in his order and then proceeded to decide the grounds of appeal raised by the assessee. He held that the decision of the ld. Assessing Officer to disallow the deduction under secton 54 was very much in accordance with the grounds on which the case had been selected for limited scrutiny and the very fact that the ld. Assessing Officer had to ascertain the nature of the assessee’s activities before making the disallowance could not be said to be a violative of the mandate given to the ld. Assessing Officer under the limited scrutiny provisions. With regard to the claim that the ld. Assessing Officer was not justified in ignoring the order-sheet entry dated 12.05.2017, he held that in the first place, the assessee had not provided any documentary evidence with regard to the same and secondly the ld. Assessing Officer was not debarred from issuing fresh notices to the assessee. The assessee did not raise these objections at the time of assessment and could not raise them now. Several opportunities had been provided by the ld. Assessing Officer during the course of assessment proceedings and therefore the ground was fit to be dismissed. With regard to holding the income from sale of flats as business income, the ld. CIT(A) held that the property had been developed for sale purposes. Therefore, it could only have been seen as a part of business activity. The receiving of advances from customers testified to the fact that the assessee had intention to construct flats for selling them and therefore, 5

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 the AO’s could not be faulted for treating the same as a business activity. The ld. CIT(A) distinguished the case laws cited by the assessee pointing out that the case of CIT vs. Shashi Kumar Agarwal (supra) could not apply to the present case as the assessee had constructed flats on the property, which could be considered as separate immovable properties. The case was different from that of CIT vs. Sohan Khan & Mohan Khan (supra) because in the present case, the ld. Assessing Officer had made clear that the land was used as stock in trade for the construction of the flats. Furthermore, he distinguished the matter from the case of CIT vs. R.V. Gupta (2002) 124 Taxman 191 (Delhi) pointing out that in the said case, the Court had given relief because four of the six flats were sold to friends. However, in the present case, the assessee had not shown any relationship between purchaser parties and himself. Furthermore, the ld. CIT(A) observed that the ld. Assessing Officer had given clear findings that 83% of the total construction cost of rupees i.e. Rs. 1,07,40,000/- was met out of advances received from purchasers. Therefore, it was clear that it was the intention of the assessee to develop the land by constructing flats and selling them to parties for profit. The ld. Assessing Officer had observed that the flats had been sold even before the construction had been started and the assessee had not used the same for residence. He held the order of the ld. Assessing Officer to be exhaustive and self-explanatory and he pointed out that the assessee had failed to prove that the land was developed as capital asset and not as stock in trade. Accordingly, he confirmed the additions made by the ld. Assessing Officer and dismissed the appeal of the assessee. 4. The assessee is aggrieved at this decision of the ld. CIT(A) and has accordingly come before us. Sh. Atul Agarwal, C.A. (hereinafter referred to as the ld. AR) representing assessee reiterated the arguments that had been made earlier before the ld. CIT(A). He also pointed out that the intention of 6

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 construction in the property could be seen from the fact that it had begun by taking housing loan from the bank (which was not a project finance or business loan). He further pointed out that the ld. CIT(A) had arrived at several erroneous assumptions. Firstly, the ld. Assessing Officer had not required the assessee to substantiate that the assessee did not have relation from purchaser parties. Secondly, he had categorically assumed that the remaining flats had also been developed and sold, when he held that the flats constructed were meant for sale, whereas the truth was that the assessee had sold few flats to meet construction cost and repay the loan and retain a few flats for himself and his family members. Furthermore, the assessee had never converted the said land into stock in trade. The presumption of the ld. CIT(A) that he had done so was without any documentary evidences. In reality, the land had been retained by the assessee for a period of 16 years and during that course that there was no change in the said land. Hence, the said land had never converted into stock in trade. The ld. AR placed reliance on the following of the various case laws in support of his contention:- “i. Raj Dulari Bhasin vs. Commissioner of Income-tax [2016] 65 taxmann.com 136 (Delhi) ii. Commissioner of Income-tax vs. R.V. Gupta [2002] 124 taxman 191 (Delhi) iii. Vikas Solvextracts (P.) Ltd. vs. Deputy Commissioner of Income- tax, Cir-5, Kolkata [2018] 89 taxmann.com 197 (Kolkata-Trib.)”

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 customers. These two facts demonstrated the fact that the property was never developed as a capital asset for the assessee’s own use but rather with the intention and purpose of sale. The ld. CIT(A) had correctly pointed out that the case laws cited by the assessee were distinguishable from the facts of the assessee’s case. The explanation that some flats have been sold in order to meet purchase cost and repay the loan could not be justified as a ground for holding the receipts from the sale flats to be capital gains because the activity was exactly similar to that of builders who obtain advances from customers to construct and sell building to them. The assessee had sold 8 out of the 12 flats that had been constructed and therefore, it was clear that he had developed the property with the intention of selling most of it. It, therefore, clearly constituted an adventure in nature of trade and the ld. Assessing Officer was justified in disallowing the claim of deduction under section 54, against such receipt. 6. We have duly considered the facts and circumstances of the case and the arguments advanced by both parties. At the very outset, it is important to consider the case laws cited by the ld. AR and included alongwith his written submissions to determine whether the facts of the assessee’s case fall within the parameters of those case laws. In the case of CIT vs. Sohan Khan & Mohan Khan (supra), where the land was purchased as a capital asset, held for a long period and thereafter divided into plots before selling the same, the Hon’ble High Court of Rajasthan held that there was nothing to show that the land was purchased with the intention to sell at a profit and even though the land was decided to be sold in piecemeal by earmarking plots, it would still remain a disposal of a capital asset and not a transaction of any, “stock in trade” so as to be described an adventure in the nature of trade. It is seen that the case of the assessee is different from that in the above case since in the case of CIT vs. Sohan Khan & Mohan 8

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 Khan (supra), there was no change in the nature of the asset, it continued to remain a piece of land that was divided into plots and sold with a view of fetching a better value. It was not developed as a set of flats unlike in the present case. Hence, the case would not have application to the facts of the present case. In the case of Raj Dulari Bhasin vs. Commissioner of Income- tax (supra), the issue in question was the assessee handing over a piece of land to a builder for the construction of a multi-storied apartment and receipt from the builder of a residential flat and some cash as a result of the agreement entered into with the builder, did not show that the assessee ever had an intention to exploit the plot as a commercial venture and that the construction of the sale of the flats did not change the character of the asset therefore, the same was not an adventure in the nature of trade. Similarly, in the case of Vikas Solvextracts (P.) Ltd. vs. Deputy Commissioner of Income-tax (supra), the assessee had transferred its land to a developer for the development of the said land into a residential complex and subsequently obtained flats which it got from a developer. The sale of these flats was held to be long term capital gain as it was not a case where the land was sold after converting it into stock in trade of business. Both these cases are somewhat different from that of the case of the assessee, in that the Hon’ble High Court and Tribunal have held in these cases that what the assessee received was essentially the cost of the capital asset which had been held by it and therefore, the exercise could not be considered an adventure in the nature of trade. In the case of the assessee, there was no similar agreement, but rather the assessee had independently undertaken the construction of flats which were subsequently sold and therefore, the findings of the Hon’ble Court and Tribunal in this case would not apply to the facts of the assessee’s case. The assessee has cited the case of Commissioner of Income-tax vs. R.V. Gupta [2002] 124 taxman 191 9

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 (Delhi) and submitted that his case is covered by the same. However, we note that in the said case, the Hon’ble High Court has not answered any question of law. Rather on consideration of the facts of that case, it has held that no question of law arises. In the circumstances, it could not be said any legal precedent had been laid down by the instant case. Furthermore, it was observed by the Hon’ble Delhi High Court in that case, that four of the six flats that had been constructed were sold to friends and it was for this reason that the Hon’ble High Court agreed with the findings of the Tribunal, that it did not constitute an adventure in the nature of trade. We find that the facts of the assessee’s case are somewhat that different in that the assessee has not been able to bring on record any evidence to show that the eight flats sold by it (of which two were in this assessment year) were sold to relatives and friends as a part of a desire for community living. In our opinion, the same is vital, as in such a case the price received for the sale of flats could be construed as the contribution of the purchasers towards a project for community living, to which the assessee had brought to his land as his contribution. However, where no such meeting of minds is established, the sale would remain a pure commercial transaction. 7. We note that the Hon’ble Supreme Court has pointed out in the case of G. Venkataswami Naidu & Co. vs. Commissioner of Income Tax (1959) AIR 359, that if a person invests money in land intending to enjoy its income for sometimes and then sells at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. It held that cases of realization of investments consisting of purchase and re-sale, though profitable, were clearly outside the domain of adventure in the nature of trade. In deciding the nature of such transactions, it held that several factors were relevant, such as;

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 i. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it. ii. What was the nature of the commodity sold and in what quantity it was purchased and sold. If the commodity is generally the subject of the trade, and if it purchased in a very large quantity, it would tend to eliminate the possibility of investment for personal use. iii. Whether the purchaser by any subsequent act, subsequent to the purchase of the commodity improved the quality of the commodity purchased and thereby made it more easily re-salable? iv. What were the incidents associated with the sale and purchase? v. Were they similar to trade or operations associated in such business? vi. Are the transactions of purchase and sale repeated? vii. In the regard to purchase of the commodity and its subsequent possession, does the element of pride of possession come into the picture? viii. Was the purchase made within intention to sell it at a profit?

The Hon’ble Court pointed out that it was the total effect of all the relevant factors and circumstances that determined the character of the transaction and the decision on the character cannot be determined solely on application of any abstract rule, principle or test and must in every case depend on the relevant facts and circumstances. Thus, we may analyze the facts and circumstances of the assessee’s case in the light of this judgment of the Hon’ble Supreme Court to understand the character of the transaction. 8. The first issue is whether the purchaser was a trader and whether the purchase and sale of the commodity was part of his regular business or 11

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 incidental to it. It is seen that the assessee was not a regular trader in properties and that the property had been purchased and held by him for nearly 16 years. The second issue is whether that what was the nature of the commodity and in what quantity it was purchased and sold and whether it indicated that the assessee wished to hold the property and enjoy income from it. The quantity of land purchased of 351.17 Sq. Mtrs is not conclusive in determining whether the land was purchased with a view of personal enjoyment or using it for commercial purposes but the quantity of flats constructed on the said land is indicative that the construction activity was not for personal enjoyment, which is further confirmed by the fact that it was funded out of customer advances. The third question is whether the purchaser by any subsequent act subsequent to the purchase of the commodity improved the quality of the commodity purchased and thereby made it easily resaleable. The fourth question is that what were the incidents associated with the sale and purchase. The fifth question is were they similar to the trade or operations associated with such business? In this context, it is observed that the assessee constructed 12 flats on the said property and thereby improved the saleability of the property that was purchased by him. The major cost of construction was met out of advances received from these customers even before the building was constructed, indicating the intention to construct for sale. The nature of the steps taken by the assessee was consistent with the steps taken by other real estate developers who construct multi storied buildings, on parcels of land out of advances received from customers and subsequently sell them. The sixth question is whether the transaction of purchase and sale are repeated. It is noticed that there is no regular sale and purchase of land and construction of flats carried out by the assessee though the sale of the flats in this building takes place over a number of assessment years. However, the 12

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 Hon’ble Supreme Court in the case of Commissioner Of Income Tax vs. Sutlej Cotton Mills Supply Agency (1975) 100 ITR 706 (SC) has clearly brought out that it is unfair to apply the test of regularity to the question of adventure in the nature of trade, because if regular transactions were there, then it would be a business or trade and the question of whether the activity was an adventure in the nature of trade will not arise. It is only when the transaction cannot be properly regarded as a business, that the question of an aventure in the nature of trade arises. Thus, the judgment has quite clearly brought out the fact that even a single transaction can constitute an adventure in the nature of trade. Further, in answering the final two questions, it is clear that since the flats were never constructed for enjoyment by the assessee, the element of pride of possession do not arise and whatever the intention of the assessee may have been at the time of purchse, it is quite clear that the construction was made by him beyond his needs only with the intention to sell to prospective buyers. 9. In the light of these parameters laid down by the Hon’ble Supreme Court, we are inclined to agree with the ld. Assessing Officer that the assessee was engaged in an adventure in the nature of trade of construction and sale of flats and therefore, his income from this venture should be assessed under the head, “income from business or profession”. Going by the facts of the assessee’s case, the assessee went in for construction of 12 flats, out of which he subsequently sold 8 to various persons. We are in agreement with the ld. Assessing Officer and the ld. CIT(A) that the fact of construction of 12 flats and subsequent sale of two thirds of those flats to unrelated parties indicates the intention to exploit the property commercially and therefore, irrespective of accounting entries, the transfer does not remain the transfer of a capital asset. Rather, it becomes an adventure in the nature of trade. Obviously, the effect of this 13

ITA No.222/VNS/2024 Mani Shankar Pandey A.Y. 2015-16 is that the assessee would not be entitled for subsequent deduction under section 54 of the Income Tax Act. However, since it is being held to be a business income, the proportionate cost of land attributable to the flats sold and the proportionate cost of construction attributable to the flats sold is deductible from the amount received on sale of the flats while computing the taxable business income of the assessee from the sale of those flats. 10. In the result, the appeal filed by the assessee is dismissed. Order pronounced as per Rule 34(4) of Income Tax (Appellate Tribunal) Rules, 1963 on 05.10.2026.

Sd/- Sd/- [JUSTICE (RETD.) C.V. BHADANG] [NIKHIL CHOUDHARY] PRESIDENT ACCOUNTANT MEMBER DATED:05/10/2026 Sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT DR, ITAT 4. CIT, 5. The CIT(A) By order Sr. P.S.