KUTCH DEVELOPMENT ORGANISATION-HOPE 1000,MUMBAI vs. C.I.T.13, MUMBAI

This is an appeal filed against the order passed by the ld. CIT u/s.263 of the Act, dated 31.01.2012. The assessee Kutch Development Organisation - Hope 1000 (in short KDO), which is the name of the community i.e. Kutchi Dasha Oswal (KDO) and HOPE, is a good symbolic name, made up of two words, i.e. HOusing PEople. The assessee- organization was formed as an Association of Persons (AOP) consisting of 14 members and is a non-profit organization. It was a Special Purpose Vehicle (SPV) to acquire land and carry out day to day management of money and administration and finally hand over to a charitable organization the land and other rights and close the AOP. None of the members of the AOP have contributed any money and there is no profit sharing. Their contribution was honorary and selfless service and their goodwill. Thus it is not a usual AOP as is understood normally. The AOP formed vide agreement dt.25.01.1995 wherein the preamble in page No.3 at para 2 of the said agreement reads as under :- "Whereas the parties of 1st to 14th parts hereto are doing their own respective businesses and are doing very well by the grace of almighty and the forefathers of the community. At this stage of life they feel that they should wholeheartedly contribute their mite for the betterment of the community people and other Jains at large by 3 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 providing them residences with amenities at reasonable or even a subsidised rates and provide them better living environment with modem facilities and proposed township site at Dombivli (East). With this sale objective this instrument of association executed on this 25th day of January, 1995 as Real Estate Owners, Builders, Developers, Contractors etc. under the" name and style of "KUTCH DEVELOPMENT ORGANISATlON - HOPE 1000".

It is, thus, evident from the reading of the agreement dt.25.01.1995 that 14 persons have come together under one roof as association to contribute towards upliftment of the people of Kutchies and other Jains at large and the object for which the AOP was formed was charitable in nature.

Kutch Development Organisation Ltd is a registered company under Section 25 of the Indian Companies Act, 1956 and is also assessed to tax. It is to this no dividend charitable company the AOP was to assign the ultimate land etc. received in the form of overriding title. Keeping in view the above objectives, the AOP acquired development rights in about 16 Acres of land at Dombivli (east). The money required for acquiring this was raised in a novel way i.e. land was used as a resource. About half of the land was plotted and 125 plots of land were allotted to community members. The balance land was to be used for subsidized housing scheme for the not so well to do jains. As this scheme was progressing, many community members expressed desire that if the community can think of a small sanatorium in natural environment with green foliage all around, growing their own style of vegetables and food items, getting fresh milk, and in the vicinity of the city of Mumbai, it will be of great help to the weaker sections to recoup health. With this view in mind, the 4 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 impugned agricultural land at Ritghar, Panvel, was purchased by the AOP. The project was named as ABDASHA ESTATE, in the name of the Taluka in Kutch where Jain community people resided before migrating to Mumbai and other areas. The assessee stated before the authorities that it was doing this entire housing project with an intention of not making any profit thereon. It explained that it had an approach problem for their acquired land and path leading to their land was being claimed by the village. There were few pockets of land in between the land belonging to the assessee, which it could not purchase and those owners of land locked parcels of land were creating terrible problems to the assessee. The villagers did not allow the assessee to grow any crops. It was also submitted that as a matter of fact, some of the villagers, actually continued to till the land and enjoyed the income and the assessee could not prevented in spite of appointing security. The assistance of police and legal help sought by the assessee was of no avail. Since the members of the AOP, who were extremely busy in their respective businesses in Mumbai had no time or energy to fight villagers or for litigation and that too at Panvel, the land was continued to be classified in the revenue records as agricultural (underlining provided by us) . There is no dispute that the land, which was being tilled but by others, was fully surrounded by farm lands. The assessee pleaded that the said land is located about 14kms away from Panvel. No plotting of land or conversion of agricultural land into non-agriculture was done. No layout, roads and other facilities were provided. The land was purchased in acres and was sold in acres.

5 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 5. The return of income for the assessment year 2007-08 was filed by the assessee on 22-11-2017 declaring Nil income. The original assessment was completed u/s.143(3) the Act on 24.12.2009 determining total income at Rs. Nil. The AOP is engaged in the business of Real Estate, Owners, Builders, Developers, Contractors, etc. During the course of assessment proceedings, the assessee produced the copy of bank statement, balance sheet, profit and loss account, capital account, copy of agreement for formation of AOP, copy of sale agreement and statement showing purchase agreement of agriculture land at Panvel, copy of agreement of Dombivali land, statement showing application money received for Bungalow plot, monthwise details of expenses etc. The ld. AO in the assessment order passed u/s.143(3) of the Act dated 24.12.2009 in para 5 observed as under :- “5. During the year under consideration the assessee has sold agricultural land at Panvel and shown loss at Rs.8,31,799/- which is shown as exempt. The P & L A/c reveals that the assessee has shown net profit at Rs.7,10,661/- and transferred to Work in Progress A/c.” Finally the ld. AO in the computation of income in the assessment order framed u/s.143(3) of the Act dated 24.12.2009 observed that long term capital loss on sale of agricultural land at Panvel of Rs.8,31,799/- is exempt. It is not in dispute that the ld.AO examined the aspect as to whether the land sold at Panvel by the assessee is an agricultural land or not during the course of assessment proceedings. In this regard, the assessee placed on record a letter dated 30.11.2009 filed before the ld. AO (enclosed in page 34 of paper book), wherein the authorised 6 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 representative of the assessee had written a letter to the ld.AO stating that the land sold during the year at Panvel is agricultural land and capital gain on the same is not applicable, however, while filing the return of income, capital loss was shown thereon and the same is not to be considered as capital loss while framing the assessment. In other words, authorised representative of the assessee had categorically stated before the AO that since the land sold at Panvel is an agricultural land and such sale had resulted in long term capital loss of Rs.8,31,799/- and the said loss is not eligible to be carried forward to subsequent years since this is an agriculture land. The ld. AO on being duly satisfied on this aspect, accepted the plea of the assessee vis-à-vis relevant documents and completed the assessment.

The assessee also stated that the successor Assessing Officer was of the opinion that the income earned by the assessee on sale of land at Panvel would have to be treated as business income and sale value of such agricultural land should be taken as per the provisions of Section 50C of the Act. The successive AO issued a notice u/s.154 of the Act dated 28.07.2011 seeking to rectify the computation of capital gains by adopting consideration value fixed as per the Stamp Duty Authority in terms of Section 50C of the Act by treating the sale of land as business income. The assessee filed a detailed reply dated 10.08.2011 objecting to the proposal of the ld. AO. Thereafter no order was passed u/s.154 of the Act by the ld. AO.

It was also pleaded that in any case the value as per the Section 50C of the Act cannot be applicable for land held as stock-in-trade as the provisions of Section 50C are applicable only for capital assets. The assessee in support of its various arguments placed reliance on the series of decisions rendered in the context of Section 263 of the Act by various Hon‟ble High Courts and the Hon‟ble Supreme Court.

Ld.CIT, however, disregarded the contention of the assessee on the ground that the assessee did not do any agricultural activities on the subject mentioned land at Panvel and no agricultural income was reported thereon. Moreover, since the assessee is engaged in the business of real estate, owner, builder, developer and contractor etc, the land at Panvel would also be of business asset of the assessee and, hence, the gains from sale of such land would have to be construed only as business income of the assessee. Ld.CIT also observed that there is no doubt that the land is shown as agriculture land in the revenue records. He observed that merely the land is shown as agricultural land in the revenue records, it would not be sufficient to hold the sale of land as agricultural activity. The main criteria would be to examine as to whether the land was actually 9 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 or ordinarily used for agricultural purposes at or about the relevant period in consonance with the intention of the owners of the land. He observed that the real intentions of the owners (i.e. the assessee herein) were not ascertained by the ld. AO, nor the ld. AO had called for any record to examine these issues nor was any discussion made by the ld. AO. Hence, it cannot be held that the ld. AO had formed any opinion on the issue. Ld.CIT also observed that the group of persons came together to form an AOP to do the business of real estate, developers etc and not to do any agricultural operations. The lands were purchased in pursuance of the objects of the association which was to provide residential facilities to people for their own community, hence, there cannot be two opinions that the lands were nothing but stock-in-trade and business asset of the assessee. Hence, the gains arising from the sale of such lands would have to be treated only as business income of the assessee.

With regard to examination of the purchase and sale agreements of lands by the ld. AO as contended by the assessee is concerned, the ld. CIT observed that the purchase of sale agreement documents alone would not determine the nature of income. The ld. AO did not examine the objects of the AOP and the nature of the land. The ld. AO ought to have appreciated the fact that there was no agricultural operations carried out by the assessee and no agricultural income was reported form the subject mentioned lands, hence, no consideration of these vital aspects would make the order of the ld. AO erroneous and prejudicial to the interest of revenue. With these observations, the ld. CIT passed order u/s.263 of the 10 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 Act, dated 31.01.2012 setting aside the order of ld. AO with the direction to treat the sale proceeds of land at Panvel as business income of the assessee. Aggrieved, the assessee is in appeal before us.

We have heard rival submissions and perused the materials available on record including the paper book filed by the assessee. It is not in dispute that the lands purchased at Panvel were agricultural lands as per the revenue records. We find that the assessee had explained with cogent reasons as to why the agricultural operations could not be carried out by it on the subject mentioned lands in view of the encroachments by certain villagers. We find that the assessee had also explained that certain villagers were actually tilling the lands belonging to the assessee for agricultural purposes and the agricultural income derived thereon were taken away and enjoyed by those villagers. These facts were not controverted by the ld. DR before us, hence, one of the contentions of ld. CIT that no agricultural operations was carried out by the assessee and no agricultural income was reported by the assessee for treating the lands as non-agricultural land, cannot be accepted.

The ld. AR also argued that without prejudice to his original arguments that the subject mentioned land is agriculture land and the gains derived thereon would have to be taxed only under the head capital gains, also argued that the provisions of Section 50C of the Act cannot be made applicable to business asset. Hence, replacing the sale consideration value at Rs.52,98,075/- being the Stamp Duty value as per Section 50C of the Act cannot be done in the instant case. We are in 11 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 complete agreement with this alternative argument of ld. AR and held that provisions of Section 50C cannot be made applicable to business asset. Reliance in this regard is placed on the decision of Hon‟ble Madras High Court in the case of CIT Vs.Thiruvengadam Investments (P.) Ltd., (2010) 320 ITR 345 (Madras).

We also find that the subject mentioned land at Panvel is situated beyond 8 kms. from the municipal limits, which fact is not disputed by the ld.CIT. Hence, even if the sale of agriculture land is to be subjected to tax under the head capital gains, we find that the subject mentioned land is exempt u/s.2(14) of the Act. Hence, the sale of agricultural land in the instant case at Panvel, cannot be taxed even under the head capital gains, as it is not a capital asset u/s.2(14) of the Act.

We find the purchase of agriculture land at Panvel being made for sanatorium purpose as enumerated in the facts above, which admittedly an independent activity other than the regular objects enumerated in the objects of the association as business of real estate, builders and developers etc.

In any case, we hold that whether the agriculture land is held as capital asset or as business asset, it does not alter the character of the asset.

We also find that the ld. AO has made elaborate enquiry on the subjected mentioned issue of sale of agricultural land at Panvel and had categorically mentioned in the assessment order by not following the long term capital loss on sale thereon in the sum of Rs.8,31,799/- to 12 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 subsequent years. This goes to prove that the ld. AO has fully applied his mind on the subject mentioned issue and the ld. CIT is only trying to substitute his own opinion in the place of opinion already framed by the ld. AO. In our considered opinion, the same cannot be done under revision proceedings u/s.263 of the Act. There is no incorrect assumption of facts or incorrect opinion of law on the part of the ld. AO. We find that the ld. CIT did not have any fresh material that has come to his knowledge to take a different view contrary to the view already taken by the ld. AO on the issue. This is a clear case of ld.CIT negating from the same documents that are already available on record and it is a different conclusion, which amounts to substitution of his opinion.

We also find from the perusal of the balance sheet of the assessee that the assessee main object of engaging in business of real estate, developers is being carried on as is evident from the figures reflected in “work-in-progress” in respect of Dombivli project in the balance sheet of the assessee. In any case, the object clause of the association is not determinative of the activity carried on by the assessee. Reliance in this regard is placed on the decision of Hon‟ble jurisdictional High Court in the case of Fort Properteis (P.) Ltd. Vs. CIT, 208 ITR 232.

In view of the aforesaid observations and by placing reliance on the various judicial precedents, cited hereinabove, we hold that the ld. CIT has erred in invoking the provisions of Section 263 of the Act, in the instant case of the assessee and we hereby quash the proceedings 13 ITA Nos.2629/Mum/12 & ITA No.236/Mum/2014 M/s Kutch Development Organisation Hope-1000 initiated by the ld. CIT u/s.263 of the Act. Accordingly, the grounds raised