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Before: Shri Mahavir Singh & Shri G Manjunatha
Date of hearing 26-10-2017 Date of pronouncement 08-11-2017 O R D E R
Per G Manjunatha, AM :
This appeal filed by the revenue is directed against the order of CIT(A)-4, Mumbai dated 23-07-2015 and it pertains to AY 2010-11. The revenue has raised the following grounds of appeal:-
“On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. "On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the claim of expenditure under the head business income as there is hardly any activity relating
2 to derivatives and finance during the previous year." 2. "On the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in treating the sale consideration received on sale of ownership land as business income. The Ld. CIT(A) did not appreciate the fact that the land was owned by the assessee for a long period of time and it had shown in the Balance Sheet as Investments." 3. "On the facts and the circumstances of the case, and in law, the Id. CIT(A) erred in not appreciating the fact that the provision of Section 50C of the /. T. Act, 1961 is code by itself and applicable on the sale of a capital asset in computing the long term capital gains." 4. "On the facts and the circumstances of the case, and in law, the Id. CIT(A) erred in allowing the business expenses as well as the conversion of capital asset into stock in trade."
The brief facts of the case are that the assessee is a limited company, engaged in the business of dealing in ownership lands, shares, derivatives and also engaged in money lending business. The assessee has filed its return of income for the assessment year 2010-11 on 24-09-2010 declaring total income of Rs.1,86,89,776. The case was selected for scrutiny and notices u/s 143(2)and 142(1) were issued. In response to notices, the authorised representative of the assessee appeared from time to time and filed necessary details, as called for. The assessment was completed u/s 143(3) on 25-03-2013 determining the total income at Rs.2,75,04,044 interalia making additions towards re-working of capital gain from sale of ownership lands under the head, ‘Income from capital gain’. the CIT(A). Before CIT(A), the assessee filed elaborate written submissions to challenge addition made by the AO towards reworking of income from sale of ownership land under the head ‘capital gains’ on the ground that the assessee has converted its ownership land from investments into stock in trade u/s 45(2) of the Income-tax Act, 1961 and the resultant gain on sale of such lands has been assessed under the head ‘ Income from business’. The CIT(A), after considering relevant submission of the assessee observed that the assessee has converted ownership land into stock in trade and treated the income, if any, arising from sale of such land under reference under the head ‘business income’. Therefore, the AO was incorrect in assessing the income from sale of ownership land under the head ‘Income from capital gain’. Insofar as expenses claimed against business income, except legal expenses relataing to eksali lands other expenses are to be allowed while computing the total income. With these observations, the CIT(A) partly allowed appeal filed by the assessee.
Relevant portion of the order of CIT(A) is extracted below:-
“4. I have considered the finding of the A.O., rival submission of the appellant and background of the matter, carefully. I find that the appellant company has passed a Board Resolution dated 04.09.2009 for converting the said ownership lands into stock in trade. The valuation report for the market value for this property has also been obtained. The said resolution has been passed much before the Assessment Order for the year
4 2009-10 dated 30.12.2011 as also the Order of CIT(A) dated 30.11.2012. Note No.7 of the Accounts also refers to the said conversion of the land into stock in trade and is reproduced below for ready reference-
The company owns land at Bhayandar, Ghodbunder and Mira, which are classified as "investment in immovable properties. Most of the land is occupied by tenants. Lands where the tenants name has been wrongly mentioned in the "kabjedar"(Owner) Column and that of the company in the other rights column in 7112 extracts have been classified as "Eksali lands" and wherever the company's name appears in the "kabjedar"(Owner) column in the 7112 extract have been classified as "Ownership Lands'.” The company is claiming ownership of these lands which is being contested before the appropriate authorities/ courts. The Company has converted "Ownership Lands" held by it at Bhayandar, Ghodbunder and Mira, which was hitherto held as an investment, into stock-in-trade w.e.f. 30.09.2009. In view of accounting standards AS-2 and AS-13, no entries have been passed in the books of accounts to give effect to these changes. However, the profits arising on the sale of these lands will be computed in accordance with section 2(47)145(2) and section 28 of the income Tax Act, 1961."
The appellant has also disclosed the said'conversion in the Tax Audit Report.
In order to facilitate the said dealings in the said ownership land, the appellants have entered into a facilitation agreement dated 26.10,2010 with A. R. Bhayandar. As regards the expenditure incurred by the appellants, the A.O. has accepted the genuineness of this expenditure and has also allowed the deduction to the extent of income offered under the head business income. The disallowance of balance expenditure of Rs.88,14,268/- is based on the stand taken for the A.Yr.2009-10 that it is disproportionate to the income from derivative
5 transactions, share trading, interest, etc. offered to tax by the appellants. After setting off the said income against the expenses incurred, the A.O. has disallowed the expenditure / loss of Rs.88,14,2681-. I find that in the A.Yr.2009-10, the then Ld. CIT(A) has given a detailed finding and reasoning that the appellant is a dealer in ownership lands and therefore the said ownership lands constitute stock in trade of the appellants. The Ld. CIT(A) has, therefore, held that the profit on sale of 'ownership land' is to be taxed as business income. Consequently, it has been held that all expenses claimed by the Appellants are to be allowed either against income from derivative transactions, share trading, interest and sale of ownership lands. The relevant portion of the CIT(A)'s Order relating to this issue is reproduced below:
"6.2 Assessee is regularly selling its plot of lands, whether they are ownership land or Eksali lands. This activity of selling of lands is very frequent and legal as well as brokerage expenses and other related expenses are incurred with regard to sale of such lands. Therefore, it is to be considered whether such activity is a business of the assessee or it is merely resulting in capital gains as claimed by the assessee. The A.O. has assessed the capital gains/loss declared by the assessee as business income on protective basis vide para 9 of the assessment order, in case of ownership land, assessee has to execute conveyance deed and maintain its rights, therefore, it requires legal consultation and other expenses regarding ownership land, whereas, in case of Eksali lands, merely a No Objection Certificate is given by the assessee and certain legal expenses are incurred in this regard. Therefore, I agree with the A.O. that the income of the assessee from sale of land is business income to the extent it relates to ownership lands only, because the ownership land is treated as stock-intrade and the same is sold in the form of plots very regularly. Whereas, the transactions regarding Eksali lands are not in the nature of business, because the assessee's right is a limited right and it has only to issue a No Objection Certificate, therefore, Eksali land cannot be treated at 6 par with ownership lands. These limited rights in Eksali land cannot be converted to stock-in-trade and, therefore, income from release of interest in Eksali lands is assessable as Capital Gains only as offered by the assessee. Accordingly, only legal expenses relating to Eksali lands are allowed to be reduced from the sale consideration of Eksali lands while calculating the capital gain from release of rights in Eksali lands. 6.3 While computing income from business and profession on transfer of land by the assessee, A.O. has allowed all expenses claimed by the assessee vide para 9 of the assessment order, because the computation has been started from the net profit as per profit and loss account and automatically all expenses claimed by the assessee have been allowed. In view of the above decisions, all expenses claimed by the assessee are either necessary for maintaining corporate status or relate to business of trading in derivatives, other securities and money lending or relates to transfer of ownership land or relates to release of rights in Eksali lands. There is no dispute on the nature and genuinely of the expenditure and, therefore, A.O. has allowed all expenses vide para 9 while computing the income from business and profession. Therefore, in view of the above discussion and decision, all expenses claimed by the assessee are allowed as business expenses except a small part out of legal expenses which relates to release of rights of Eksali lands and the same is allowable while computing capital gain on account of release of rights of Eksali lands. The legal expenses relating to Eksali lands will be decided by the A.O. on the basis of the details produced by the assessee at the time of giving effect to this order and the same will be allowed against, capital gain to be computed on account of release of rights on Eksali lands by the assessee. 6.4 In result, it is held that income from transfer of ownership lands is to be assessed as business income and therefore, all expenses which have been claimed by the assessee other than, part of the legal expenses relating to Eksali lands are allowed as business expenses against trading in derivative and other securities business, money lending business and the business income from transfer of ownership lands. interest income and balances written back are also to be assessed as Business income 7 as declared by the assessee. While computing "Income from business and profession", the issue relating to cost of land and sale price may arise, but, when the income from transfer of ownership land is assessed as business income, then, the original cost to the assessee of such land is to be allowed as cost instead of cost as on 01.04.1981 in case of Capital Gains and no indexation is allowable to the assessee on such costs. On conversion of land to stock-in-trade, it results partly in capital gain and on sale as business income, whereas, in the case of the assessee, increase in cost at the time of conversion to stock-in- trade will reduce the income from business and to the same extent capital gain will increase, therefore, increase in capital gain will be set-off by the decrease in business income and, therefore, there will be no effect on the total taxable income. Further; the sale price as declared by the assessee is to be accepted because provisions of section 50C are not applicable in case of business income in view of the submissions of the assessee and decision relied by the assessee, particularly the decision of Hon'ble 1TAT in the case of Indralok Hotels Pvt. Ltd. v/s. iTO (32 SOT 419) (Mum) and the other decisions relied by the assessee."
Respectfully following the decision of my learned predecessor in A.Yr.2009-10 and with a view to maintain judicial consistency, A.O. is directed to accept the conversion of ownership land into stock-in-trade and treat the income, if any, arising from sale of such land under reference, as business income. Consequently, all expenses claimed by the appellant, except legal expenses relatable to Eksali lands are to be allowed while computing the total income.”
Aggrieved by the order of CIT(A), the revenue is in appeal before us. The Ld.DR submitted that the Ld.CIT(A) was erred in treating the sale consideration received on sale of ownership land under the head ‘business income’ as the assessee has owned the ownership lands for a long period of time and it had shown in the balance-sheet as investments. The AR further submitted that the ‘business income’ as there is hardly any activity relating to derivative and finance during the previous year. The CIT(A) erred in not appreciating the fact that the provisions of section 50C of the I.T. Act, 1961 is code by itself and applicable on sale of a capital asset in computing the long term capital gains.
The AO has brought out clear facts to the effect that income from sale of ownership land is rightly assessable under the head capital gains and his order should be upheld.
5. On the other hand, the Ld.AR strongly supported the order of the CIT(A) and submitted that the issue is squarely covered by the decision of ITAT, in assessee’s own case for the assessment year 2009-10 in dated 20-01-2016, wherein the co-ordinate bench has categorically held that income from sale of ownership lands is to be assessed as business income. The CIT(A), after considering relevant facts has rightly directed the AO to assess income from sale of ownership lands under the head Income from business and hence, the order of the CIT(A) should be upheld.
We have heard both the parties, perused material available on record and gone through the orders of authorities below. The limited question came up for our consideration is whether on the facts and in the circumstances of the case, surplus from sale of ownership land, which are converted into stock in ‘Income from business’ or ‘Income from capital gains’. The co-ordinate bench has examined similar issue in assessee’s own case for the assessment year 2009-10 in ITA No.1105/Mum/2013. The ITAT, after considering relevant facts has held that income from sale of ownership land is to be assessed as business income. Insofar as allowability of expenses claimed against business income and applicability of provisions of section 50C are consequential in nature which challenges the head of income under which surplus from sale of land should be assessed. The ITAT, after considering the facts has held that the land dealings constitute the main business of the assessee and that the nature of expenses are such that it is apparent that the assessee has been employing various resources for maintaining its right in land for disposing the assets through lawyers, brokers, employees, etc. In this factual matrix as laid out, we concur with the order of Ld.CIT(A) in holding that all expenses other than part of the legal expenses relating to eksali lands are to be allowed against business income. The relevant portion of the order is extracted below:-
“6.3. 1 We have heard the rival contentions and perused and carefully considered the material on record. It is seen from the order of assessment that the assessee had declared the income from sale of 'Ownership Lands' as capital gains/loss. The AG while completing the order of assessment., at para 9 thereof has also assessed the income from sale of 'ownership lands' as business income on a protective basis, while at the 10 same time accepting the same as capital gains as declared by the assessee in the return of income. We find that on appeal, the Ld. CIT(A) observing that since the actively of sale of 'ownership lands' plots was quite frequent, that the land was treated as stock-in-trade and the assessee had to execute conveyance deeds and maintain its rights and in this context requires legal consultation and other expenses to be incurred; concurred with the view of the AO that the income from sale of 'ownership lands' is business income . Except for raising the ground. that income from sale of 'ownership lands' should be assessed as capital gains, since the assessee had declared the same as income from capital gains, no cogent reasons or evidence has been put forth by the Ld. DR to controvert the factual findings of the Ld. CIT(A) and also those of the AO that the income from sale of 'ownership lands' is to be assessed as business income. In the ficts and circumstances of the case as discussed above, we concur with the findings and reasoning of the Ld. CIT(A) that, in view of the frequency of sale of 'ownership lands'; the fact that the same was treated as stock-in-trade and the extent of expenses involved to execute conveyance deeds, maintain its rights and legal and other expenses incurred in this regard, we uphold the view of the ld.CIT(A) that the income from sale of 'ownership lands' is to be assessed as 'business income' . We hold and_diacrdingly. Consequently, grounds at Sr. no. 3(fñd 5 are dismissed,
6.3.2 In respect of revenue's averment that the Ld. CIT(A) has erred is not appreciating that the provisions of Section 50C of the Act were applicable on sale of capital assets for computing LTCG, we find from a perusal of the impugned order that the Ld. CIT(A) has rendered no such finding. The Ld. CIT(A) has in fact held that the provisions of Section 50C of the Act arc not applicable in the case of in case business income in view of the decision of inter alia, Indralok Hotels P. Ltd.(32 SOT 419)(Mum). We therefore reject ground no.3 (b) raised by revenue.
6.3.3. In respect of revenues claim in grounds no.4, that the Ld. CIT(A) erred in concluding that the AO has allowed all the expenses claimed by the assessee, after an appreciation of the details on record, we concur with the observation of the Ld. CIT(A) that the AO at para 9 of the Order of assessment, 11 while assessing the transfer of 'ownership lands' as business income, has allowed all expenses claimed by the assessee in regard to transfer of lands. We also find that the AO has observed that the various components of income and expenses in respect of transfer of ownership lands left him with no other option than to conclude that land dealings constitute that main business of the assessee and that the nature of expenses are such that it is apparent that the assessee has been employing various resources for maintaining its rights in land, for disposing the assets through lawyers, brokers, employees, directors etc. In this factual matrix as laid out above, we concur with the order of the Ld. CIT(A) in holding that all expenses, other than that part of the legal expenses, relating to 'Eksali lands' and those for maintaining the corporate existence of assessee and for the assessee's trading in derivatives, other securities and money lending, are to be allowed against business income from sale of ownership lands'. We consequently dismiss ground No: 4 raised by the assessee.
7. Facts remain unchanged. The revenue has failed to bring on record any evidence to prove the findings of facts recorded by the CIT(A). Therefore, considering the facts and circumstances of the case and also being consistent with the view taken by the co-ordinate bench in assessee’s own case for the assessment year 2009-10, we direct the AO to assess income from sale of ownership lands under the head ‘income from business and also allow expenses claimed against business income except legal expenses incurred for eksali lands. Insofar as applicability of provisions of section 50C is concerned, once income is assessable under the head ‘Income from business’, provisions of section 50C has no application and hence there is no merit in the ground
In the result, appeal filed by the revenue is dismissed. Order pronounced in the open court on 08th October, 2017.