NITHIN PANDURANG DHOND,MUMBAI vs. INCOME TAX OFFICER, MUMBAI

3 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond total income of Rs.3,92,950/-. The assessee’s case was selected for scrutiny under CASS to verify the following issues:- i) Whether value of consideration for computation of capital gain has been correctly show n in the return of income, (ii)Whether deduction claimed on account of interest expenses is admissible, and (iii) Whether investment and income relating to properties are duly disclosed. 4. The ld. AO on perusal of trading in profit and loss account for the year ending 31st March 2016 noted that assessee had sold an immovable property, i.e. several plots of land at Zadeshapur. Book value of property was shown at Rs.1,03,83,810/- which included purchase cost, stamp duty and registration charges. This property was purchased in the F.Y. 2013-14 and the same was transferred to his business account as stock-in-trade in the year under consideration, i.e., F.Y.2015-16. Out of the said property, few parcel of land/plot was sold on 19/01/2016 by registered sale agreement for a total consideration of Rs.7,61,53,000/-. The ld. AO held that as per Section 45(2) of the Act, the gains arising from the transfer by way of conversion by the owner of a capital asset into stock-in-trade of a business carried out by him shall be chargeable to income tax as income of the previous year in which such stock in trade is sold. Accordingly, he held that capital gain shall be calculated on such converted asset in the year in which asset is actually sold. He further observed that for the purpose of Section 48, the fair market value of the asset on the date of such conversion shall be

4 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond deemed to be the full value of the consideration received as a result of transfer of the capital asset. Despite making such an observation that capital gain has to be calculated as per Section 45(2), he computed the entire sale consideration as short term capital gain in the following manner:- Capital gain computation The Fair Market Value (FMV) of the land on the date of conversion, i.e., full value of consideration received: Rs.7,61,53,000/- Less: Indexed cost of acquisition - Rs.1,03,83,810/- --------------------- Short term capital gain @30% Rs.6,57,69,190/- (less than 36 months) ==============

5 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond 30.04.2015. The Appellant sold the plots of different dimensions during the relevant Assessment Year The Assessing Officer (AO) made an addition of Short-Term Capital Gain of Rs. 6,57,69,190/- to total Income of the Appellant. Appellant contend that the lands in question were purchased for the purpose of trading and business, and the intention from the beginning was not to hold or enjoy the land but to sell it at a profit. This means that the lands were acquired with the specific intention of engaging in a business activity of buying and selling properties. The appellant, from the very beginning, had a clear business objective in mind when purchasing the lands. The primary intention was not to hold the lands as long-term investments but to actively trade in them for profit. The appellant identified an opportunity to acquire the lands at a certain price and believed that the market value of the lands would Increase over time. The purpose of acquiring the lands was solely to engage in the business of buying and selling properties. The appellant intended to sell the lands at a higher price than the purchase cost. thereby generating a profit. This reflects a clear business motive and demonstrates the appellant's active involvement in the real estate trading business. It is important to highlight that the appellant did not acquire the lands with the intention of enjoying them personally or holding them for an extended period. The lands were seen as Inventory for the appellant's business operations, and the objective was to sell them in the future at a profit. The appellant's focus was on maximizing the return on investment by actively trading in the lands. Furthermore, the actions taken by the appellant further support the argument of a business intent. The appellant actively pursued the necessary approvals and permissions, in order to enhance the marketability of the lands. This further underscores the appellant's intention to engage in the business of real estate trading.

6 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond It is important to note that the Assessing Officer (AO) has made incorrect assumptions regarding the timeline and development of the land, which are crucial factors in determining whether the land should be treated as stock-in-trade. The AO has wrongly assumed the date of introduction of the land as 1st April 2015, without considering the actual date of acquisition and the subsequent actions taken by the appellant. The appellant has clearly stated that the land was purchased on 21st March 2014, and soon thereafter, the process of obtaining necessary approvals and permissions for development was initiated. The appellant applied for the conversion of land use from Industrial to Residential which was granted by the Deputy Commissioner Con 9th July 2014. Subsequently, the layout plan was approved by Gram Panchayat on 30th April 2015. These actions clearly demonstration that the appellant had the intention to develop the land and make it marketable for selling purposes. However, the AO has disregarded these crucial facts and has not considered the development of the land as a determining factor in classifying it as stock-in-trade. The development process is an essential aspect that establishes the appellant's intention to engage in the business of buying and selling properties. Moreover, the AO has incorrectly assumed the sales value as the fair market value as on the date of conversion for calculating capital gains. This assumption is flawed as the fair market value should be determined based on the actual market conditions prevailing at the time of conversion and not sale, taking into account factors such as location, demand, and other relevant considerations. The AO has erroneously considered the actual sales value as the fair value of the land on the date of conversion, which is incorrect. Considering these factors, it is evident that the lands were acquired for specific business purposes, with the intention of trading them for profit. The appellant's focus was on buying the lands at a favourable price, actively participating in the necessary processes to increase their value, and ultimately selling them for a higher price to generate business income.

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In light of these facts, it is imperative to recognize the appellant's clear business motive and treat the income derived from the sale of the lands as business income, rather than as capital gains. By doing so, the true intention and purpose behind the acquisition and subsequent sale of the lands can be duly acknowledged and evaluated in accordance with the provisions of the Income Tax Act.

8 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond 45(2) that transfer or conversion of capital asset into stock-in-trade will attract tax under capital gains and liability arises in the year in which the stock-in- trade after conversion is sold." 6.1.5 So there is no error in the order of the Assessing Officer and therefore this ground of appeal against the appellant. Accordingly, the ground of appeal No. 2 is dismissed. 8. We have heard both the parties and also perused the relevant finding given in the impugned order as well as material referred to before us. The main issue is whether, the sale of plots/land on the facts of the present case is taxable as business income or capital gains. In order to appreciate the controversy the facts and background of the case is reiterated. The assessee had purchased a industrial land measuring 3 acres 29 guntas situated at Zadshahapur Village, Belgaum on 21/03/2014 for which he had paid sale consideration of Rs.97,36,000/- and incurred expenditure of Rs.64,780/- towards stamp duty and registration charges. Immediately thereafter, assessee had applied for conversion of land use from industrial to residential on 09/07/2014. Accordingly, assessee was permitted the land usage for residential purpose by the competent authority. The assessee had further applied to the competent authority for sanction of layout for plotting of land after development which was duly approved on 30/04/2015 and after converting the usage of the said land, assessee had sold the plots of different sizes/ dimensions during the relevant assessment year. The ld. AO’s case is that it is a short term capital gain; whereas the case of the assessee is that the intention for buying the land was to convert the land usage and selling it as an adventure in the

9 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond nature of trade as it was purely a business asset which assessee had sold to earn business income. It has been contended before us that, at no point of time assessee had any object or intention to hold the land as his investment. But the very action of the assessee was to sell and do systematic trade in the purchase and sale of land. During the course of hearing we had asked the Ld. Counsel to file trading in profit and loss account not only for the F.Y.2015-16 but also for the F.Ys. 2017-18 and 2018-19 to see whether the assessee has been regularly doing the business of purchasing and selling of land. From the perusal of trading and profit & loss account, it is seen that assessee had shown huge opening stock of land which was bought in the year 2014 and had been showing the sales of plot/ land and disclosing it as business income and the balance land has been shown as closing stock. Not only that, it is seen that in the F.Y. 2019-20, assessee had bought further huge chunk of land and in the same manner after converting land usage and getting proper sanction of plans, developing the land into small plots had been selling for profit. Thus, it seems to be a regular pattern of carrying out a real estate business for purchase and sale of land. 9. Now the issue is, whether such purchases and sale of the land falls in the nature of adventure of trade or not? The facts as culled out from the records and discussed above, assessee had purchased a huge chunk of industrial land and thereafter, he got the land use converted from industrial to residential and also got the sanction lay out for the plots after carrying out development of land to small plots for residential purpose. The very intention

10 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond of getting the land usage changed and getting the approvals of the lay out plans shows that assessee from day one had intention to do the trade by developing and selling the land. From perusal of records of subsequent years also it is seen that the assessee identifies the land which had a huge potential and then in a systematic manner developing the same and dividing the land into small plots and after carrying out various development activities and then had been selling the plots over a period of time as business income. Further, it is seen that the land acquired at Zadshahapur Village, Belgaum had been sold in subsequent years also by way of small plots. These factors clearly show that the intention and plan to acquire land was for specific business purpose with the intention of carrying of trade in land for profit. The assessee had been buying the land at a favourable price and after getting necessary approvals and sanction and then development is carried out to increase the value and selling them at a higher price. If the assessee had acquired the land with the intention to sell after developing it constitutes business venture and adventure in the nature of trade. This precise issue had been settled by the Hon’ble Supreme Court way back in the case of Raja Rameshwar Rao vs. CIT reported in 42 ITR 179. The Hon’ble Supreme Court addressed the question of whether income derived from a transaction falls within the heading of "business income" or "capital gains. The court held that when a person acquires land with the intention to sell it after developing it, it constitutes a business venture. If the person further divides the land into

11 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond plots, develops the area, and sells the land in parcels, it qualifies as dealing with land as stock-in-trade, indicating a business activity resulting in profit. Further in the case of CIT vs. Shahrooq All Khan (370 ITR 246), the Karnataka High Court considered a similar situation and held that when a person purchases land to sell it for profit, it is business income. The Hon’ble Jurisdictional High Court in the case of Atonso Real Estate Developers Vs. CIT, 425 ITR 153 (Bom) wherein, the Hon’ble High Court had to decide the issue where receipts from the sale of property, whether constitutes business income or capital gain. The following question of law was admitted:- “i) Whether the learned Tribunal was right in holding that trans- action is a business transaction when there was only one transaction and not series of transactions? (ii) Whether the learned Tribunal has correctly interpreted the pro- visions of section 2(14) of the Income-tax Act.?” 10. On the facts of the case where the assessee, which was a partnership firm had acquired the agricultural land at Cavelossim on 15/08/1990 and the same was sold on 13/07/2006. On these facts, the Hon’ble High Court observed as under:- “The rival contentions now fall for our determination. The main issue involved in this appeal is whether the proceeds from sale of the properties vide sale deed dated July 13, 2006 can be regarded as income from business or not. 15 The appellant-assessee was constituted vide deed of partnership dated July 29, 1989. The business of the partnership is that of real estate deve- lopers. Clause 2 of the partnership deed is most relevant and the same reads as follows:

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"2. The business of the partnership firm shall be that of buying and developing the properties into plots including construction works and/or any other business as the parties hereto may mutually agree upon from time to time. The business shall include buying or selling of properties situated at various places in Goa either wholly or in plots." From the aforesaid, it is quite clear that the business of the appellant- 16 assessee is buying and selling properties situated in various places in Goa either wholly or in plots. Mr. Rivonkar's contention that the business of the appellant-assessee is only to purchase properties, develop them into plots or construct buildings upon them and thereafter to sell them cannot be accepted, looking to the aforesaid provisions in the deed of partnership by which the appellant-assessee came to be constituted. The business of the appellant-assessee very specifically includes buying and selling properties situated in various places in Goa either wholly or in plots. Considering the wide phraseology employed, it is obvious that the business of the appel- lant-assessee includes buying and selling of even agricultural properties. Accordingly, we are unable to accept that the sale of the properties by the appellant-assessee vide sale deed dated July 13, 2006 has no nexus with the business of the appellant-assessee. Besides, we find that both the Assessing Officer as well as the Com- 17 missioner of Income-tax (Appeals) have noted that by sale deed dated July 13, 2006, the appellant-assessee sold not merely the agricultural property but also another property admeasuring 2,525 sq. mtrs. to Headway Resort Line Pvt. Ltd. Therefore, this is not a case of sale of a solitary property, by way of a one off transaction. The appellant-assessee, in terms of clause 2 of the partnership deed is clearly involved in buying and selling properties situated in various places in Goa either wholly or in plots. By sale deed dated July 13, 2006, the appellant-assessee has indeed sold the properties purchased by it for a considerable profit. This material, according to us, is more than sufficient to sustain the findings recorded by the Assessing Officer and the Income-tax Appellate Tribunal. The finding of fact cannot be regarded as perverse, so as to give rise to any substantial question of law or so as to warrant interference.”

13 ITA No.661/Mum/2024 Shri Nithin Pandurang Dhond 11. Thus, the sequitor and the principle laid down in the aforesaid judgments is that one has to see the intention and the motive behind purchasing of the land. If the land has been purchased, with the intention to do trade, then same will fall in ‘adventure in the nature of trade’ and income is assessable as business income. Here in the present case assessee is carrying out systematic activity of purchase of land and converting the land usage and developing into small plots and selling them at profit and this activity is being been carried out in subsequent years also as noted by us. Thus, clearly the transaction cannot be treated as transfer of capital asset to be taxed under the head capital gain, albeit, the income is taxable as business income. Accordingly, the action of the ld. AO and ld. CIT (A) in treating the sale of land as capital gain is erroneous on facts. Accordingly, the impugned orders are reversed and we hold that assessee has rightly shown sale of land as his business income. Consequently, assessee gets relief of capital gain taxed by the ld. AO and addition is deleted. 12. In the result, appeal of the assessee is allowed. Order pronounced on 23rd July, 2024.

Sd/- Sd/- (RATNESH NANDAN SAHAY) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 23/07/2024 KARUNA, sr.ps

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Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER,

(Asstt. Registrar) ITAT, Mumbai