NEMI CHAND,GUDUR vs. ITO., WARD-1, GUDUR

The assessee had further submitted before the AO that M/s. Mishri Developers (supra), comprised of five partners, viz., (a) Sri Rikab Chand; (b) Sri Ugamraj Nahar; (c) Sri Ashok Kumar Kothari; (d) Sri R. Nemichand (i.e., the assessee); and (e) Sri Prakash Chand, who all were the lawful GPA holders of the land owners and were authorized to do the acts and duties mentioned in the GPA.

The AO based on the aforesaid facts as were brought to his notice, observed that the firm, viz., M/s. Mishri Developers (supra) was represented by the individual land owners (including the assessee) mentioned in the GPA agreements who had joined hands with the motive of earning profits. The AO called upon the assessee to put forth an explanation that now when he along with other land owners have joined hands, pooled their lands and given the same to a developer to develop plots and sell the same, therefore, why the profit/accretion arising therefrom may not be considered as his business income and Nemi Chand vs. ITO accordingly his claim for deduction under section 54 of the Act may not be rejected.

As the assessee has failed to come forth with any satisfactory explanation, therefore, the AO held the entire amount of consideration of Rs. 36,17,648/-, i.e., the sale consideration received by the assessee as his unexplained money under section 69A of the Act.

Alternatively, the AO observed that as the assessee along with certain other land owners had joined hands, pooled their lands and given the same to a developer firm, viz., M/s. Mishri Developers (supra) which was comprised of five partners who were also the independent land owners (including the assessee), thus, it was evident that they had associated with a motive to earn profit. Accordingly, the AO based on his aforesaid observations concluded that the income/accretion arising on the sale of the lands was to be considered as the business income of the assessee and, thus, his claim for deduction under section 54 of the Act was liable to be rejected.

The AO thereafter vide the order under section 143(3) r.w.s 144B of the Act, dated 23/04/2021 after treating the entire amount of sale consideration falling to the share of the assessee of Rs. 36,17,648/- as Nemi Chand vs. ITO having been sourced out of his unexplained money under section 69A of the Act, determined his income at Rs. 63,38,988/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A) but without success. “6.1.3 Decision: I have carefully examined the assessment order u/s 143(3), written submissions of the appellant, Income Tax Retum and related judicial rulings on the subject matter. The Appellant had purchased land at different dates. Besides appellant many more people have purchased the lands around same area and sold it. Appellant have submitted the sale proceeds as capital gain whereas AO has treated sale proceeds as unexplained credit and business receipts without prejudice. Since the deed have been submitted by the appellant the addition on account of unexplained credit is deleted. Regarding whether the sale is business or not the deed submitted were analysed. The following points are noted as below: (1) There were 34 sellers mentioned in the deed (2) All these sellers are represented by GPA holder M/s Mishri Developers (3) The land are together held by 34 sellers (4) The land is part of a layout by the name "Model Colony" (5) The land were purchased in the year 2006, 2007, 2009, 2014, 2015 (6) The deed mentions that the land mentioned forms a single block having thrown the above entire land into a common pool with the intention to develop the same into a layout comprising residential plots (7) The layout has taken sanction from Hyderabad Metropolitan Development Authority in 2016. The above facts in the deed shows that sale of land is not a simple stand alone transaction. The transaction is an organized activity to commercially exploit the land. The seller have pooled the land together and made layout for residential plots. This would fall under the definition of business activity and sale from the same would be taxable under the head business. Appellant submission that they have pooled together to get a better deal is not acceptable as the deed clearly mentions that there is pooling to develop a common layout and approval has been taken from Hyderabad Metropolitan Development Authority. Thus, the transaction is to be considered business transaction and income computed accordingly. AO to provide Nemi Chand vs. ITO opportunity of being heard to appellant. Accordingly, grounds of appeal

Shri Sridhar Jhawar, Chartered Accountant, the Learned Authorized Representative (for short, “Ld. AR”) for the assessee, at the threshold of hearing of the appeal submitted that both the authorities below had grossly erred in law and facts of the case in treating the sale consideration received by the assessee on the sale of land of Rs.36,17,648/- as unexplained money under section 69A of the Act. Apart from that, the Ld. AR submitted that both the authorities below had most arbitrarily declined the claim of the assessee for deduction under section 54 of the Act.

Elaborating on his contention, the Ld. AR submitted that now when the subject amount was received by the assessee as sale consideration of the land falling to his share i.e., on sale of part of the land situated at Chevella Village, Ranga Reddy District, therefore, it was incomprehensible and beyond understanding as to how the said sale consideration so received by the assessee from an explainable source could be held as the assessee’s as unexplained money under section 69A of the Act. The Ld. AR to buttress his contention submitted that the factum of sale of the subject land by the assessee along with other land Nemi Chand vs. ITO owners during the subject year had not been doubted by either of the authorities below. Also, the Ld. AR in order to buttress his aforesaid contention had drawn our attention to some of the sample sale deeds pertaining to the subject year as were placed on our record.

Apropos, the claim of the assessee that the profit/accretion on the sale of the subject land was rightly disclosed as long term capital gains against which a claim for deduction under section 54 of the Act was raised, the Ld. AR submitted that the assessee had never transferred his share of land to the partnership firm, viz., M/s. Mishri Developers, and the latter was only engaged to negotiate far better price of the land. Elaborating further on his contention, the Ld. AR submitted that as per section 2(47) of the Act, executing of a GPA in favour of any entity or individual is not to be considered as a transfer. It was, thus, the Ld. AR’s claimed that there was never any kind of transfer of the subject land by the assessee to the afore mentioned partnership firm, viz., M/s. Mishri Developers through execution of GPA. The Ld. AR drawing support from section 2(14) of the Act, i.e., definition of “capital asset” submitted that the same therein contemplates that the property of any kind held by an assessee, whether or not connected with his business or profession is a ‘capital asset’. Accordingly, the Ld. AR based on the joint reading of section 2(14) r.w.s 2(47) of the Act, submitted that the transfer of the Nemi Chand vs. ITO subject land by the assessee to the extent of his share was rightly disclosed by him under the head “income from capital gains” and the same could not have been brought to tax under the head “income from business or profession”. Carrying his contention further, the Ld. AR submitted that as the assessee had thereafter purchased a residential house on 19/10/2018, i.e., after filing of his return of income but within the prescribed time period of two years, therefore, irrespective of the fact that the sale consideration was not deposited in Capital Gain Account Scheme, the investment made in the residential houser was entitled for deduction under section 54(1) of the Act.

Per contra, Dr. Sachin Kumar, the Learned Senior Departmental Representative (for short, “Ld. Sr. DR”) relied upon the orders of the lower authorities. The Ld. Sr. DR submitted that as the assessee had joined hands with the other land owners with a motive to earn profit on the sale of the subject land, i.e., by commercially exploiting the same, therefore, both the authorities below had rightly observed that the income/accretion on the sale of the subject land was liable tot be assessed as the business income of the assessee and not under the head capital gains.

At the threshold, we may herein observe that now when the amount of Rs.36,17,648/- (supra) had been received by the assessee as his share of sale consideration on the sale of land situated at Chevella Village, Ranga Reddy District, therefore, the said amount so received by him from an explained source could not have been brought within the meaning of unexplained money under section 69A of the Act. We, thus, in terms of our aforesaid observation vacate the view taken by the authorities below who had held the amount of Rs. 36,17,648/- (supra) as having been sourced out of the assessee’s unexplained money under section 69A of the Act.

Apropos, the observation of the Ld. AO that as the assessee along with the other land owners had voluntarily associated with other land owners with a motive to earn profit by pooling their lands, developing the Nemi Chand vs. ITO same and negotiating for a lucrative consideration by giving General Power of Attorney (GPA) to a developer, viz., M/s. Mishri Developer, wherein the latter was to develop the plots and sell the said consolidated land on behalf of the aforesaid land owners (including the assessee), therefore, as observed by the AO and rightly so, the profit/accretion on the sale of the subject land which was backed by a clear motive to earn profit by the aforesaid land owners (including the assessee), was in the nature of adventure in the nature of trade, and, thus, the profit arising therefrom was to be assessed as business income in the hands of the assessee. Accordingly, once the income arising on the transfer of the land falling to the share of the assessee is to be assessed as business income, therefore, we concur with AO that there remained no occasion for him to raise a claim for deduction under section 54 of the Act. Accordingly, finding no infirmity in the view taken by the AO who had rightly declined the assessee’s claim for deduction under section 54 of the Act, we uphold the same. Resultantly, we herein modify the order of the CIT(A) in terms of our aforesaid observations.

In the result, appeal filed by the assessee is partly allowed in terms of our aforesaid observations.