M/S. CHANDRA PRAKASH GOEL,NEW DELHI vs. ITO, HAPUR

ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 17/02/2014 of learned Commissioner of Income-tax (Appeals), Ghaziabad for assessment year 2010-11, raising following grounds:

2) That in any case and in any view of the matter, action of Learned CIT-A in not assessing long term capital gain at NIL and by assessing the business income at Rs.62,39,059/- is bad in law and against the facts and circumstances of the case and that too by adopting wrong facts and figures. 3) That having regard to the facts and circumstances of the case learned CIT-A has erred in law and on facts in confirming the action of Learned AO in making aggregate disallowance of Rs.3,90,000/- under the head expenses of soil and pathai and that too without giving adequate opportunity of hearing and without bringing anything contrary on record. 4) That in any case and in any view of the matter, action of learned Commissioner of Income Tax (Appeals) in confirming the action of learned A.O in making aggregate disallowance of Rs.3,90,000/- under the head expenses of soil and pathai is beyond jurisdiction, illegal, bad in law and against the facts and circumstances of the case. 5) That in any case and in any view of the matter, action of learned Commissioner of Income Tax (Appeals) in confirming the action of learned A.O. in making the impugned addition/disallowance and framing the impugned assessment order is contrary to law and facts, void ab ignition, beyond jurisdiction, and without giving adequate opportunity of hearing, by recording incorrect facts and finding abnd the same is not sustainable on various legal and factual grounds. 6) That having regard to the facts and circumstances of the case, learned CIT(A) has erred in law and on facts in not reversing the action of learned A.O. in charging interest u/s 234A, 234B and 234C of Income Tax Act, 1961. 7) That the appellant craves and leave to add, modify, amend or delete any of the grounds of appeal in the time of hearing and all the above grounds are without prejudice to each other.

Assessment Land Land used Total Sale Exp. Of Year Sold for land consideration sale Development used 2010-11 4,665 1,100 5,765 6,650,00 400,300 2011-12 6,035 1,423 7,458 10,178,500 251,840 2012-13 604 142 746 1,274,000 25,480 Total 11,304 2,665 13,969 18,102,500 677,620 3.1 The assessee computed capital gain on sale consideration of Rs.66,50,000/- and claimed exemption for the amount deposited in capital gain account. 3.2 According to the Assessing Officer, the entire activity of converting the agriculture land into residential plots, constructing service roads and sale of plots constituted an activity as business in the nature of trade. The Assessing Officer computed the proportionate cost of acquisition of the land which was sold during the year at Rs.1,890/-. He took this amount as cost of acquisition as 01/04/1981 and after indexation computed the indexed cost of the land at Rs.10,641/-. The Assessing Officer added the expenses of Rs.4,00,300/- incurred for development of colony etc. to the indexed cost of land i.e. (Rs.10,641 + Rs.4,00,300/-= Rs.4,10,941/-) and after subtracting the said total amount from the sale receipt of Rs.66,50,000/- he computed net business income being adventure in the nature of trade at Rs.62,39,059/-. 3.3 Before the learned CIT-A, the assessee claimed that agricultural land i.e. the asset was acquired way back in 1977 i.e. 32 years back for business use and continuously used for business since then till the decision was made to sell it and as neither the assessee had acquired the land with the view to selling it later after developing it nor his activity can be described as a business income. 3.4 Alternatively, the assessee also submitted that if the assessee had carried on adventure in the nature of business, then capital asset was 45(2) of the Act. The assessee got valuation report from approved valuer for cost of acquisition as on 01/04/1981 and fair market value of the land on the date of conversion of stock in trade for its business of real estate in the financial year 2009-10 (corresponding to the assessment year concerned). The assessee computed the long-term capital gain on conversion of capital asset into plots and business income on sale of the plots during the year as under:

Capital Gain computation: Consideration of Land Sold During the Year 72,06,250.00 (F.M.V.) (1250*5765) Less: Indexed cost of 58,29,568.00 acquisition(160*5765*632/100) (Cost inflation index for year 2009-10 is taken) Gross: LTCG 13,76,682.00 Less: Exemption for Investment in Capital 11,94,000.00 Gain A/c =1376682*6250000/7206250 Taxable Capital Gain 1,82,682.00 Business Income Calculation: Sales consideration of converted plot 66,50,000.00 Less: Cost of such land (treated as stock after conversion) (F.M.V.) 72,06,250.00 Gross Business Income (Loss) (-)5,56,250.00 Less: Expenditure on sale of plots 4,00,300.00 Net Income (-)9,56,550.00 3.5 The learned CIT(A) did not accept the above contention of the assessee on the ground that the valuation report dated 25/05/2013 was filed first-time before him subsequent to the completion of the 46A of the Income Tax Rules, 1962 was made before him. The Ld. Commissioner of Income Tax (Appeals) confirmed the action of the Assessing Officer relying on the judgment of the Hon’ble Supreme Court in the case of Raja J Rameshwar Rao Vs. CIT (1961) 42 ITR 179(SC) . He referred the observation of the Hon’ble Supreme Court that “where a person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as he bought but in parcels, he is dealing with land as his a stock in trade; he is carrying on business and making a profit …...” and said that in the instant case also the assessee acquired the land in bulk and sold it in small pieces creating amenities like roads etc, and thus the transactions was an adventure in the nature of the trade. 3.6 Before us, the Ld. AR submitted that the land in question was purchased 32 years back as capital asset and in the year under consideration it was divided in pieces and sold. He said that assessee had not acquired the land with an intention to sell it later after developing it, thus it was merely a sale of capital asset and not an adventure in the nature of trade. In support of the contention he relied on the decision of the Hon’ble High Court of Rajasthan in the case of CIT Vs. Sohan Khan 304 ITR 194(Raj), decision of the Hon’ble Madhya Pradesh High Court in the case of Commissioner of Income Tax Vs. Suresh Chander Goyal, 298 ITR 277 (MP), decision of Tribunal, Ranchi SMC bench in the case of Rajesh Kumar Kabra Vs. ITO , 93 TTJ 252. 3.7 Alternatively, the Ld. AR also submitted that even if the contention of the Revenue that the assessee had carried on adventure in the nature of business, is accepted then the capital asset is required to be converted into a stock in trade in terms of section 45(2) of the Act and the gain arising on such conversion was to be treated as capital gain and subsequent profit on sale of stock in trade was to be treated as business income. He referred to the computation of capital gain submitted before the Ld. CIT-A. He further submitted that assessee has already invested in the capital gain account scheme and thus assessee was entitled for exemption accordingly. 3.8 On the contrary, the Ld. Senior DR, relied on the finding of the authorities below. 3.9 We have heard the rival submissions and perused the relevant material on record. The undisputed facts in the case are that the land in question was purchased in the year 1977 and as submitted before the Ld. CIT-A by the assessee, it was purchased for business use and continuously used for business since then till the decision was made to sell it. During the year, the assessee converted the said land into residential plots and built service road for approaching those plots. In subsequent two years also the assessee incurred expenditure on construction of roads or development of land and sold the residential plots. The assessee developed the entire area of land in the form of a residential colony called “ Prahlada Nagar” . 3.9.1 In the present case the issue involved is whether the entire transactions of purchase of agriculture land and subsequent resale of developed residential plots constitute an activity of adventure in the nature of trade or merely a sale of capital asset and alternatively, whether the conversion of agriculture land into residential plots should be treated as conversion of capital asset into a stock in trade liable for ‘capital gains’ under section 45(2) of the Act and subsequent profit on sale of plots as business profit liable for tax under the head ‘profit and gains of business or profession’.

3.9.2 First, we examine whether the entire transaction of purchase of agriculture land and subsequent sale in the form of residential plots, is as an adventure in the nature of trade. 3.9.3 The Ld. AR argued that the transaction was not an adventure in the nature of the trade because at the time of purchase of the land there was no intention to resale it at a profit. For the proposition that existence of intention to sale the property at profit, is essential for holding the transaction as adventure in the nature of trade, the Ld. AR relied on the judgment of the Hon’ble High Court of Rajasthan in the case of CIT Vs. Sohan Khan (supra). In the said case, Hon’ble High Court relied on the decision of the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). 3.9.4 In that case, Hon’ble Supreme Court said that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction as adventure in the nature of trade or capital gain. Further the Hon’ble Supreme Court made a general observation that if a person invest money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be clear case of capital creation and not profit derived from an adventure in the nature of trade. Further, the Hon’ble Supreme Court proposed to examine existence of various factors as follows in cases of realization of investment consisting of purchase and resale for deciding whether the transaction is an adventure in the nature of trade: whether the purchaser a trader and whether the purchase of the (i) commodity and its resale, allied to his usual trade or business or incidental to it; nature of commodity purchased and sold and its quantity (ii) purchased and sold; Act subsequent to the purchase (iii) improve the quality of the commodity purchased and there were made it more readily saleable and; whether the incident associated with purchase and sale are (iv) similar to operations usually associated with trade or business whether the transaction of purchase and sale repeated (v)

3.9.5 The Hon’ble Supreme Court observed that the presence of all the relevant circumstances mentioned or any of them may help the court to draw an inference but it is not a matter of merely counting the number of facts and circumstances, pros and cons and what is important to consider is the distinctive character. In each case, it is the total effect of all the relevant factors and circumstances that determines the nature of the transaction. 3.9.6 Thereafter, regarding intention to sell with profit, the Hon’ble Supreme Court observed that the presence of such intention is no doubt a relevant factor and unless it is offset by presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The Hon’ble Supreme Court then held that the decision about the character of a transaction in the contexts cannot be based solely on the application of any abstract rule, principal test and must be in every case depend upon the relevant facts and circumstances. 3.9.7 In the case of Sureshchandra Goyal (supra), also the Hon’ble High Court of Madhya Pradesh held the issue whether the converting of the land into plots and subsequent sale would be capital gain or adventure in the nature of the trade, is a question of fact. In the said case tax effect involved was less than Rs. 2.00 lakhs and the appeal was finally dismissed by the Hon’ble High Court in view of circular issued by the CBDT for not filing or withdrawing appeals in low tax rate cases. 3.9.8 In the case of Rajesh Kumar Kabra(supra), the Tribunal has examined the decision of the Hon’ble Supreme Court in the case of G Venktaswami Naidu & Co. (supra) and in the facts and circumstances of the case held the income from sale of land as liable for long-term capital gain. 3.9.9 Thus, we conclude that intention to acquire the land with a view to selling it later cannot be a sole criteria, for deciding whether the transaction is an adventure in the nature of trade and it depends on the other facts and circumstances coupled with the said transaction. 3.9.10 In the instant case, the assessee purchased land as capital asset for business use and continuously used for the business for 32 years prior to converting the same for residential purpose. After converting the land into residential plots, the assessee built service roads so as to make the plots saleable. The assessee also incurred expenses of more than Rs. 4 lakhs during the year for developing the land. The assessee also built service roads and incurred expenses in subsequent years for development of plot of land. For selling the plots of land, the assessee named the entire colony as Prahlad Nagar. There are multiple transactions of sales also. 3.9.11 All these facts and circumstances manifest that entire transactions of purchase of agriculture land and sale of developed residential plots in full, cannot be treated as sale of capital asset only. Simultaneously, the entire transaction also cannot be treated as adventure in the nature of the trade. In our opinion, the entire transaction need to be divided into two parts. The first part is purchase of agriculture land and conversion of same into the residential plots. The second part of the transaction is development of the converted land and sale of those residential plots. In the alternative submission before the Ld. CIT-A, the assessee has also accepted that residential plots constituted stock in trade of his business of real estate in the financial year 2009-10 (i.e. financial year corresponding to the assessment year in consideration). All the facts and circumstances of the case also make it evident that the second part of transaction of the conversion of land into residential plots and sale thereof was an adventure in the nature of trade or a business activity and should be taxed under the head ‘profit and gains of business/profession’ and first part of the transaction becomes liable for capital gain tax in terms of section 45(2) of the Act, which reads as under:

“Capital gains.

3.9.12 The assessee also submitted computation of capital gain on first part of the transaction and business income from the second part of the transaction before the Ld. CIT (A). We find that evidences required for computation of capital gain were not requested by the assessee for admission as additional evidence and thus Ld. CIT-A did not decide the submission of the assessee. In view of above circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer to compute capital gain in terms of section 45 (2) of the Act and business income from the transaction, in view of our finding above. While computing the capital gain, the Assessing Officer may examine the fare market value of the land in accordance with law. It is needless to mention that assessee shall be afforded sufficient opportunity of hearing. The grounds 1 and 2 of appeal are accordingly allowed for statistical purpose.

Assessment Opening Sale Closing Productio Pathai % Soil % year Stock Stock n A B C D E=(A=B-C) F G=F/E H I=H/E % % 2009-10 0 1,415,503 2,076,470 3,491,973 524,300 15% 262,150 8% 2010-11 2,076,470 5,856,014 3,903,867 7,683,411 1,037,992 14% 452,480 6% 2011-12 3,903,867 7,055,151 5,988,933 9,140,217 1,067,390 12% 424,641 5% 4.2 The Ld. CIT-A did not accept the contention of the assessee and confirmed the disallowance. 4.3 Before us, the Ld. AR submitted that disallowance has been made on ad-hoc basis by the Assessing Officer and the same have been sustained by the Ld. CIT-A. He said the under the head ‘soil’, 40% of the total expenses have been disallowed, whereas under the head ‘pathai’ approximately 20% of the total expenses debited have been disallowed. He submitted that disallowance made in arbitrary and ad-hoc manner, need to be deleted. 4.5 We have heard the rival submission and perused the relevant material on record. Before the Assessing Officer, the assessee could not justify its claim of relevant expenses except relying that same was recorded and vouched and comparable with similar cases. On perusal of the comparative chart furnished before the Ld. CIT(A), we find that expenses on soil and pathai varied from year to year and the assessee could not explain such variation in expenses. The assessee has not furnished any comparison of expenses with other entities engaged in similar activity. We also note that the expenses under respective heads are more in percentage terms compared to subsequent year but less as compared to last year. In view of the circumstances, we feel it appropriate to restrict the disallowance at the rate of 10% of the total expenses debited under the head ‘soil’ and ‘pathai’. Thus, the addition to the extent of Rs.45,248/- under the head ‘soil’ and Rs.1,03,799/- under the head ‘pathai’ is sustained and the remaining addition is directed to be deleted. Accordingly, ground No. 3 and 4 of the appeal are partly allowed.

The decision is pronounced in the open court on 20th March, 2017.