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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI BR BASKARAN, AM & SHRI ABY T. VARKEY, JM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax/NFAC, [hereinafter referred to as the “CIT”], Delhi dated 08.05.2023 for assessment year 2013-14.
In the several grounds raised
in the appeal, the Revenue has agitated the action of the Ld. CIT(A) holding that the assessee was engaged in the business of real estate development and therefore the plot of land held by it was in nature of ‘stock-in-trade’ as opposed to the AO’s action of holding the said plot of land to be in nature of ‘capital asset’. According to Revenue therefore, since the said plot of land to be in nature of ‘capital asset’, the levy of capital gains tax stood triggered upon execution of Joint Development Agreement (herein ITA Ns. 2404/Mum/2023 A.Y. 2013
14. Shreyas Builders after ‘JDA’) during the relevant year, in terms of Section 2(47)(v) of the Income Tax Act 1961 (herein after the ‘Act’).
For better understanding of the issue involved in this appeal, it would be relevant to first set out the facts leading to present dispute. The assessee is a partnership firm which was formed to pursue the business of Construction, buying and selling of land, buildings, Industrial sheds etc. For the relevant AY 2013-14, the assessee had filed its return of income on 22.10.2013 declaring total income at NIL. The AO has noted that, the assessee had acquired land parcels situated at Dombivali [Village Bhopar, Registration Sub-District kalyan, District Thane and within the limits of Village Panchayat Bhopar, District Thane bearing Survey Nos. 38(1), 38(2), 38(3), 39, 40, 236(1) pt, 236(2) pt, 236(3) pt, 238 (5) pt and 259 pt admeasuring about 25,161 sq. yds. Equivalent to 21,037,.63 sq. mtrs.] vide registered agreement dated 19.05.1982 from Shri Balkrishna Kalyandas Mehta for consideration of Rs.3,50,000/-. During the relevant year, the AO noted that, the assessee had entered into a registered agreement on 27.07.2012 with M/s. Anmol Associates (herein after ‘Developer’) for transfer of Development Rights in respect of the aforesaid land owned by the assessee. In lieu of grant of development rights, the assessee was entitled to receive 30% of total constructed area in each and every building constructed on the said land on equitable basis with all amenities.
According to AO, as a consequence of this agreement, the possession of the land was given by the assessee to the Developer ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders along with an irrecoverable power of attorney and permission to enter upon the said land and develop & construct buildings thereon. It is noted that, the Developer was inter-alia permitted to put up signages on the said property announcing any schemes. The Developer was also entitled to do all acts, things, and matters including to make, sign and submit all applications, representations, undertakings etc., as may be required by the developers. It was agreed that the Developer shall construct the buildings at their own cost, risks and expenses and shall pay all the taxes, cess to the public authorities. The Developer was also authorized to sell or allot on ownership basis, their share of flats, shops, premises in the building or structure on the said land. The Developer was authorized to take steps to form and register cooperative society or societies under any name and style, as the developer deemed fit, and it was also given liberty to collect the amounts towards the share money and other ancillary expenses from the prospective purchaser of flats, shops, premises etc. According to the Agreement, the Developer was required to complete the development work within 60 months from the date of execution of the agreement. It was further agreed that in case of delay of work, the assessee shall get his share i.e. 30% of the constructed area within the time limit of 5 years. The Agreement is noted to further state that, it will not be treated as partnership between the assessee and the Developer or an agreement for sale of the said land by the owner to the developer and only rights to develop the land has been given. The said Development Agreement is noted to have been registered with the stamp duty authorities and the value of consideration of 30% of total ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders constructed area was Rs.30,43,75,000/- as on the date of registration on which stamp duty had been paid.
The AO further noted that, two partners namely M/s Amkhim Holdings Pvt. Ltd. (holding 10% share in the assessee firm) and M/s Vasant Kotak & Bros Trading & Investment Pvt. Ltd (holding 70% share in the assessee firm) had also become partners in the Developer Firm i.e., M/s Anmol Associates for a share of 10% each vide partnership deed dated 18.05.2012. The AO accordingly held that, the entire sequence of events clearly showed that, the transaction was in the nature of joint development agreement and that, upon execution of the same, the assessee had transferred the development rights held in the land, which was a capital asset held/owned/possessed by the assessee since 1982, to the developer triggering levy of capital gains tax in the relevant AY 2013-14. It is noted that, the AO vide order sheet noting 03.11.2015 had required the assessee to justify its claim of non-taxability of Capital Gain on the transfer of development rights in the relevant assessment year and to show cause as to why not the same be taxed. It is noted that, in response, the assessee had furnished its objections vide letter dated 18.11.2015. The AO however did not accept the contention of the assessee for the reasons set out in Para 5 of the assessment order. Instead, the AO held that there was transfer of ‘capital asset’ in relevant AY 2013-14 by way of grant of development rights in land by the assessee to the Developer resulting in accrual of capital gains within the provisions of Section 45 r.w.s. 2(47)(v) of the Act. Taking the registered value of Rs.30,43,75,000/- to be the sale ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders consideration, the AO worked out the resultant capital gains, after deducting cost of purchase and cost of further improvements at Rs.30,10,94,476/-. For the sake of convenience, the relevant findings of the AO are extracted below: - “5. The contention of the assessee has been carefully perused. However, the same is not accepted due to the following reasons: -
(i) In the return of income for AYs 2011-12, 2012-13 and 2013- 14, the said land was shown under the head loans and advances. The said land was not shown as stock in trade at any point of time earlier in the return of income.
(ii) Vide letter dated 20.08.2015, the assessee has Itself stated that the land has been kept as an Investment since the date of purchase in the year 1982 and the firm has not carried any business activity since then.
(iii) The value of the consideration has also been determined and stamp duty has been paid on the same. That means the contention of the assessee regarding future hope is not material here in view of the provisions of section 2(47)(v) of the I.T. Act, 1961. (iv) As per the various clauses of the development agreement discussed earlier, it is noticed that possession of the property has been handed over to the developer along-with irrevocable power of attorney, authority to sell the flats related to the developer, to ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders discharge all the obligations and taxes related to the property etc.
(v) Moreover, the assessee has commenced construction of the said property and vide letter dated 15.01.2016 the assessee has furnished various certificates by the architect Dilip Deshmukh & Associates certifying completion of various levels of various wings in the project called Shanti Niketan on the said land. As per the information furnished eleven wings containing 362 units in its entirety including flats and shops were to be constructed on the said land and the bookings of 52 units have been done till 15.01.2016. Further, vide letter dated 26.02.2016, the assessee has submitted an unregistered agreement between the assessee and the developers M/s Anmol Associates for allocation of the flats/shop to be constructed. In this regard, the provisions of Section 53A of the Transfer of Property Act, 1882 are relevant to discuss here. As per section 53A of the Transfer of Property Act, 1882 the following conditions have to fulfilled in order to effect a transfer:
(1) there must be a contract to transfer for consideration any -a immovable property; (2) the contract must be in writing, signed by the transferor, or by someone on his behalf: (3) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained; (4) the transferee must in part performance of the contract take possession of the property, or of any part thereof; (5) the transferee must have done some act in furtherance of the contract; and ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders (6) the transferee must have performed or be willing to perform his part of the contract In the instant case, all the above conditions are fulfilled as there is a contract, which is written and signed by the transferor, the wordings of the contract, which include giving possession and irrevocable power of attorney and right to sell the share of developers construe the transfer, part performance has been effected as possession has been handed over, the developer i.e. the transferee has started construction on the property and as per submissions construction of three wings have been completed out of 11 wings till date and bookings for the flats have been started, Moreover, the agreement to share the flats has also been entered. It was further seen from the agreement to share the flats between the assessee and the developer that they have distributed/allotted the flats on some particular floors of each wing between themselves which supporting fact that construction of some flats of the assessee is also completed as construction of flats of developer has also been completed on the said floor of any particular wing and the developer has started booking of his share of flats. Accordingly, the developer has done numerous acts in furtherance of the contract and is willing to perform his part of the contract.
(viii) The contention of the assessee that permissions from Zilla Parishad, Thane has been taken in 2008 is of no help to the assessee as the said permission is in nature of improvement only in the capital asset as the assessee has not done any construction activity on the land since the date of approval till the grant of development rights in FY 2012-13. ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders (ix) The contention of the assessee that the ownership of the land remained with the assessee is of no help to the assessee as the possession of the land has been given with irrevocable power of attorney and conveyance of land after completion of project to the society would be an ancillary event to the substantive event of transfer of development rights in the land.
(x) As per provisions of section 2(47)(v), wherein the word ‘transfer’ has been defined, “transfer” in relation to a capital asset, Includes, any transaction involving the allowing of the possession of any immovable property to be taken or retain in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. In the instant case, both the above conditions are fulfilled.
(xi) Reliance is also placed on the decision of Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v/s CIT (2003 260 ITR 491 BOM).
(xii) In a recent letter no. F.No.225/58/2016/ITA.II dated 29.02.2016 of Department of Revenue (CBDT) addressed to Income Tax authorities, the above view has been supported. The relevant extracts of the said letter are as under:
“In real-estate development protects in India, Joint development agreement (IDA) with single or multiple owners has become preferred and effective option. Under JDA a portion of revenue or a portion of built up property is transferred to land-owner only after the sale of property or on completion of the project.
ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders Under provisions of Income Tax Act, 1961 (Act) any profit or gains arising from the transfer of a capital asset, effected in the previous year, is chargeable to tax under the head “Capital Gains” and is deemed to be income of the previous year in which transfer took place. Further, as per sub-clause (V) of clause (47) of section 2 of the Act, “transfer” in relation to a capital asset includes allowing possession of immovable property under a contract referred to in section 53A of the transfer of property Act, 1882 (TP).
Thus, in JDA where agreement to sell has been entered into by the transferor (land owner) with the transferee (developer) or general power of attorney for development of land has been given by the land owner and possession handed over to the transferee in part performance of the contract under section 53A of the TP Act, the provisions of section 45(1) of the Act, read with 2(47)(v) become applicable and transferor (land-owner) is liable to pay capital gains tax on the value of land in the year the JDA was entered into”.
Accordingly, it is clear from the view expressed by the CBDT that the above transaction discussed in various Paras is transfer in the F.Y.2012-13 and liable for Capital gain tax.
In view of the above discussion, it is hereby held that transfer of capital assets has been done in F.Y.2012-13 by way of granting the development rights in the instant case and profits and gains have been accrued and arisen in the F.Y.2012-13 within the provisions of section 45 r.w.s, 2(47)(v) of the LT. Act, 1961, resulting in Long Term Capital Gain chargeable to tax in the A.Y.2013-14, Hence, Long Term Capital Gain on the ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders said transfer is required to be added in the total income of the assessee and taxed accordingly.” 6. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the above addition. The Ld. CIT(A) is noted to have held that, the conduct of the assessee and evidences available on record, showed that the assessee was engaged in the business of real estate development and that the plot of land held in the course of such business was in nature of ‘stock in trade’ and not ‘capital asset’ and therefore the provisions of Section 45 read with Section 2(47)(v) of the Act did not have any application. The Ld. CIT(A) is noted to have further held that, even otherwise, the Joint Development Agreement in question only granted license / permission to enter and construct to the Development which did not result in transfer of possession and control over the land, and therefore the provisions of Section 2(47)(v) of the Act had no application, and consequently the charge of tax under Section 45 of the Act fails. Being aggrieved by the order of Ld. CIT(A), the Revenue is now in appeal before us.
Assailing the impugned action of Ld CIT(A), the Ld. CIT DR appearing for the Revenue relying on the order of the AO pointed out that, the assessee itself had admitted in their letter dated 20.08.2015 addressed to the AO that, the land was held as ‘investment’ and therefore their argument that it was in nature of ‘stock-in-trade’ was an after-thought. The Ld. DR relying upon the decision rendered in the case of Prakash G Chawla Vs ACIT (111 taxmann.com 307) argued that the determining factor to decide whether an asset is an investment ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders or inventory, are the relevant facts and nature of business and not the entries passed in books of accounts. He accordingly pointed out that, the land had been acquired in 1982, whereas, the Development Agreement was executed in 2012, after a gap of 30 years and thus, according to him, this fact corroborated the AO’s case that the land bore the nature of ‘capital asset’. According to him, had it been ‘stock- in-trade’, the assessee would have acted quickly to monetize the same. He also laid emphasis on the fact that, the assessee never undertook any construction activity and therefore it cannot be said to be engaged in business. On the issue of applicability of Section 2(47)(v) of the Act, the Ld. DR argued that the assessee had indeed transferred possession of the land to the Developer by way of a registered agreement, and therefore according to him, the conditions laid down in Section 53A of the Transfer of Property Act, 1882 stood fulfilled, to invoke Section 2(47)(v) of the Act. For this, he cited on the decision of Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia vs. CIT (supra), as relied upon by the AO.
Per contra, the Ld. AR for the assessee supported the findings of the Ld. CIT(A). Taking us through the chronology of events, the Ld. AR showed us that, the assessee-partnership firm was formed for the purposes of pursuing undertaking business in the field of real estate. He pointed out that, even in past viz., 1977, prior to purchase of the land parcel in 1982 (which land is in question), the assessee had undertaken real estate project, Shreyas Industrial Estate in Goregaon, Mumbai and the income derived therefrom was offered to tax as and ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders by way of ‘Business Income’. Thereafter, the firm had acquired land parcels in question in the year 1982 to undertake another real estate project. He showed us that, the assessee had taken active steps to make the land parcels exploitable by first removing the hurdles faced under the Urban Land (Ceiling & Regulation) Act, 1976, obtaining sanction of building plans from Zilla Parishad, litigating to get the revenue records amended etc. He further pointed out that, only when the assessee had been finally able to get necessary clearances, it entered into a Joint Development Agreement on area sharing basis, with the intent to obtain constructed space in all the buildings to be constructed and maximize its profits by selling the units by themselves to prospective buyers. The Ld. AR also showed us that, as and when the constructed spaces were received and sold by the assessee, the corresponding revenues had been offered to tax by way of ‘Business Income’ in the later years, following project completion method. According to him therefore, the conduct of the assessee clearly showed that the land parcels were held by way of ‘stock-in-trade’. He specifically invited our attention to the first page of the assessment order, wherein the AO had also observed that, the Nature of Business of the assessee was “Builders and Developers” and the business of the assessee was later on described to include buying and selling of land, buildings etc. Referring to these observations, the Ld. AR submitted that, the AO himself had acknowledged that the assessee was engaged in business of real estate and therefore his finding that the land parcels were capital asset and not inventory of the assessee, was factually contrary to the aforementioned categorical observation. The Ld. AR ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders further explained that, the only asset held by the assessee firm in its books was the impugned land parcels. According to him, a partnership firm is formed amongst partners to pursue a business activity. He pointed out that, the very fact that, the only asset owned by the assessee was land parcels which it had exploited to earn profits / gains, clearly evidenced that, the only possible business activity of the assessee firm was that of real estate development. The Ld. AR thus submitted that the Ld. CIT(A)’s findings holding that, the impugned land parcels were ‘stock-in-trade’ of the assessee and therefore not amenable to provisions of Section 45 read with Section 2(47)(v) of the Act which is applicable only to ‘capital assets’, does not warrant interference. He also took us through the relevant clauses of the Development Agreement, to support the findings of the Ld. CIT(A) that, even otherwise, the Development Agreement did not result in transfer of possession of land within the meaning of Section 2(47)(v) of the Act and hence, no capital gains arose in the relevant year.
We have heard both the parties and perused the material placed before us. The first issue in dispute before us is, whether the assessee can be said to be engaged in the business of buying and selling lands & building and therefore whether the land held by it constituted ‘stock in trade’ or ‘capital asset’. Depending upon the answer to the aforesaid issue, the next question to be answered is, whether any income accrued either by way of ‘Business Income’ or ‘Capital Gains’ in the relevant AY 2013-14. ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders 10. In order to answer the first issue, let us first seek guidance of the important principles laid down by the Hon’ble Supreme Court as to how to ascertain the nature of business of an assessee. The Hon’ble Supreme Court in Karanpura Development Co. Ltd. v. CIT (44 ITR 362) has observed that, the objects of the assessee entity must be kept in view to interpret the nature of activities. This view was reiterated by the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd Vs CIT (373 ITR 673) wherein also the objects set out in the memorandum of association of the company was held to be decisive to ascertain the nature of business of the assessee. In the given facts before us, it is noted that, the assessee is a partnership firm and on perusal of the terms of partnership, it is noted that the partners of the assessee firm had resolved to undertake the following business objects :-
It is agreed by and between the parties hereto that the partnership business shall be continued to be that of construction, buying and selling of land, buildings and industrial sheds etc. and/or dealing in such other articles, goods or things, as the parties hereto may agree upon from time to time.
The Ld. AR had also pointed out that, in the year 1977 and prior to the acquisition of the land parcel in question, the assessee firm had similarly undertaken another real estate venture M/s Shreyas Industrial Estate and the income derived therefrom had been assessed to tax by way of ‘Business Income’. It is also noted that the AO at Para 3 of the assessment order has observed as follows: - ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders “The assessee is a partnership firm which is engaged in the business of construction, buying and selling of land, buildings, industrial sheds etc. The income declared by the assessee for the year consists of Income from business only….”
The above facts in light of the guiding principles laid down by the Hon’ble Supreme Court (supra) lends credence to the assessee’s case that, it was engaged in the business of buying & selling land & buildings.
The next aspect to be considered is whether the particular asset i.e., the land acquired at Dombivali can be said to be in nature of ‘stock-in-trade’ or is it ‘capital asset’. The Revenue is noted to have has laid much emphasis on the fact that, the assessee had initially admitted in their letter dated 20.08.2015 that, the land was held as investment and that it was recorded under the head ‘loans & advances’. In this context, it would be gainful to refer to the decision of the Hon’ble Supreme Court in the case of Kedar Nath Jute Mfg. Co Ltd Vs CIT (82 ITR 363) wherein it was held that the existence or absence of entries in the books of account be decisive or conclusive in the matter. Also, as noted above, the AO also himself had initially recorded a finding that, the assessee was engaged in business of buying and selling lands, but the ultimate finding was that the land parcel to be ‘capital asset’. However, according to us, the nature and character of an ‘asset’ has to be judged from the relevant facts and circumstances of the case and not simply on entries made in books or bald averments made by the parties. For this, we may first gainfully ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders refer to the judgment of the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. (35 ITR 594). In the decided case, the Hon’ble Court had noted that, the assessee had purchased four continuous plots of land admeasuring 5.26 acres. After a gap of five years, these properties were sold in two lots to a company which was managed by the assessee. The question for consideration was whether, the sale of the land was assessable under the head “Business” or “Capital Gains”. The AO had noted that, the assessee had acquired these land parcels systematically to meet the requirements of their related entity, who would have required them to expand their business. The AO therefore held that, the assessee must have purchased them solely with a view to sell them to make profit. Although the transaction was an isolated one but in view of the Department, it had all the elements of a business transaction and thus it was an adventure in the nature of trade. Upholding the findings of the AO, the Hon’ble Apex Court is noted to have held that, even an isolated transaction can satisfy the description of an adventure in the nature of trade. The Hon’ble Court held that, a single plunge in the waters of trade may partake the character to an adventure in the nature of trade. While holding so, the Hon’ble Court set put the following principles which are relevant to come to a conclusion as to whether a particular transaction is an adventure in the nature of trade or not.
“Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these questions may furnish relevant data for determining the character of the ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resale able? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the court to draw a similar inference; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders relevant factors and circumstances that determines the character of the transaction.
In this connection it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to resell it at a profit? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half-way course. This statement may be broadly true; and so, some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the 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 ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders inclined to hold that the transaction was not an adventure in the nature of trade. We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.”
We note that, similar aspect was again considered by the Hon’ble Supreme Court in the case of Raja J Rameshwar Rao Vs CIT (42 ITR 179) wherein the Hon’ble Court had held as under :-
5. In this appeal, we are only concerned with the first question, because if that question be answered in the affirmative, as did the High Court, the second question would not arise. It was contended that whether there was a business and profit from it was not a question of pure fact but a mixed question of law and fact, and that the High Court was in error in treating it as a question of fact. In our opinion, this contention hardly arises, because the High Court examined the record, and came to the conclusion that there was evidence to support the finding, and that is the matter upon which the question was referred for the opinion of the High Court. In our opinion, the High Court answered the question correctly. No doubt, this was only a single venture; but even a single venture may be regarded as in the nature of trade or business. When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the 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 ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders bought it but in parcels, he is dealing with land as his stock-in- trade ; he is carrying on business and making a profit. This is exactly what had happened in the assessee's case.
Following the above ratio decidendi, the Hon’ble Andhra Pradesh High Court in the case of M.Krishna Rao (120 ITR 101) took note of the fact that, the assessee had purchased land along with another person. The Hon’ble Court observed that, the assessee had taken steps to convert the land-use and thereafter sold the same. The Hon’ble Court accordingly held that, whether the assessee intended to deal in real property or not has to be judged not form the fact that there was a time lag between the first transaction and second transaction, but from the facts whether he sought to take any steps to exploit the said land. On the given facts of this case, the actions of the assessee confounded its intention which was to carry on business in real estate and thereof the profits derived therefrom was held to be assessable to tax as an adventure in the nature of trade.
In light of the above guiding principles, what emerges is that, the ascertainment of the nature of an asset is essentially a fact-based exercise. We therefore revert back to the facts of the case before us. Before us, the Revenue has contended that, the assessee held onto the land for more than 30 years and even in the relevant AY 2013-14, the assessee did not itself engage in construction but entered into a Development Agreement handing over the land to another Developer, which showed their intent that the land in question was in nature of ‘capital asset’ and not ‘inventory’. In this regard, we note that, indeed, ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders the land parcel was acquired in the year 1982. It is however noted that, the terms agreed in the purchase agreement dated 19.05.1982, which has been placed at Pages 1 to 18 of Paper Book, revealed the intent of the assessee to exploit the same to make profit. The relevant clauses noted by us, in this regard, are as follows :-
“7. It will be the sole responsibility of the Purchasers at their own costs to pursue the said Applications under the ULC Act and obtain necessary permissions or sanctions of the authorities under the same Act and the sanction of the building plans. While granting such permission or sanction if the authorities concerned stipulate any terms or conditions including the condition relating to payment of any amount, then and in such event the Purchasers alone shall be responsible to comply with such terms and conditions at their own costs including payment of any amount so stipulated.
9. On payment of full purchase price, it will be open to the Purchaser to submit building plans to the Local Municipality or Gram Panchayat and Collector of the District and/or other authorities for the proposed construction of building on the said lands and to pursue the Vendor’s said applications under Section 20 or 21 or to make fresh applications for the purpose for which the Vendor shall execute a Power of Attorney in favour of the three partners of the Purchasers in the form of draft already approved by the Vendor’s advocates on the Purchasers agreeing to indemnify and keep indemnified the Vendor against all claims, actions, demands, costs, charges, expenses, losses and damages if any incurred, sustained or suffered by the Vendor as a result or by reason of his executing such power of Attorney…”
ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders 17. It is thus noted that, the intent of the assessee was abundantly clear at the time of acquisition of land that, it intended to obtain clearance under the then Urban Land Ceiling regulations and thereafter obtain sanction for the building plans for the proposed construction of the project. The Ld. AR pointed out that, pursuant to the said purchase agreement, the assessee had faced issues under the Urban Land Ceiling regulations and the land parcel was ultimately conveyed only on 16.02.1998, copy of which has been placed at Pages 19 to 32 of the Paper Book. It is noted that, in order to pursue its intended real estate project on the land parcel, the assessee had previously obtained a Power of Attorney (POA) from the Land Owner on 22.01.1998 and the relevant clauses of this POA clearly shows that the assessee always intended to commercially develop and exploit this land. The delay however is noted to have occurred since the assessee was unable to obtain relevant permissions for the reason that the land was affected by the restrictions placed under the Urban Land (Ceiling & Regulation) Act, 1976. The Ld. AR drew our attention to the fact that, the assessee had also filed necessary application for the same on 15.05.2006. It was however only when the Urban Land (Ceiling & Regulation) Act, 1976 was repealed in the State of Maharashtra with effect from 29.11.2007 that the assessee became eligible to undertake construction of building over the land parcels at Dombivali. And pursuant to it, the assessee had also obtained permission from the Zilla Parishad, Thane vide its letter reference no. ZP/56/2008 dated 14.11.2008. All these facts and circumstances considered cumulatively indeed supports the assessee’s ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders case that, the land was always intended to be held as an inventory to be commercially exploited for gains.
The Ld. AR further showed us that, post this permission, the assessee had taken steps to make amendments to the land revenue records and record the name of assessee as the ‘owner’. It was pointed out that, the Deputy Collector had declined this request, against which Writ Petition in WP No. 2296 of 2010 was filed before the Hon’ble Bombay High Court and due to the intervention of the Hon’ble High Court order dated 06.05.2010, the issue was decided in favour of the assessee and finally the revenue records got amended on 14.07.2010. The Ld. AR further showed us, that, simultaneously, the heir of the erstwhile land owner from whom this land had been purchased had sought to dispute the assessee’s title to the land, for which separate litigation was going on and the assessee was able to obtain injunction against the plaintiff [heir of erstwhile land owner] in 2010 and the suit filed by the plaintiff had also been dismissed in 2011, but once again the heir of the erstwhile land owner [plaintiff] has filed appeal against the order of Civil Court, which is still pending adjudication.
Having regard to the above contemporaneous facts, it is noted that the reasons for holding onto the land parcels since 1982 had been sufficiently explained by the assessee. The assessee had invested tremendous amount of time and monies in acquisition of land to make it fit for exploitation. In fact, all the above acts of the assessee clearly shows that the land was never acquired as an investment but it ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders constituted inventory of the assessee firm who at all times intended to commercially exploit it by construction building on it.
The Ld. AR has further demonstrated that, only because the construction ultimately was not undertaken by the assessee, cannot be the decisive reason to hold that the land was in nature of ‘capital asset’. It was pointed out that, the assessee had faced several hurdles and problems in acquiring the land, getting clear title and making it fit for commercial exploitation. Thereafter, the task to undertake construction and market the spaces, required substantial capital outlay, risks & responsibilities viz., dealing with local labour, obtaining relevant sanctions/permissions from local councilors, municipal authorities etc. It is for this reason, the assesse decided to involve Developer, M/s Anmol Associates to jointly exploit the land. In terms of the Development agreement, the assessee gave the license to the Developer to enter and construct buildings on the land parcels and the Developer had agreed to undertake the same. The agreement between the parties contemplated that the Developer would complete the construction of the new building and on completion of the new building; the Developer was to hand over the Owner’s allocation being 30% of the constructed space to the appellant in the said project. It is noted that, the assessee was handed over its share in the constructed spaces in four (4) buildings which were completed by FY 2018-19. Out of the constructed area delivered by the Developer, the assessee systematically sold several units and the gross sale proceeds were credited to assessee’s Profit & Loss Account and offered to tax by way ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders of ‘Business Income’. Having taken note of the aforesaid facts and also the facts as discussed in preceding paragraphs, we are in agreement with the Ld. AR that only because the assessee did not undertake construction on its own, it cannot be held that it was not engaged in business of buying & selling lands & building. On the given facts, we thus hold that, the intention of the assessee was always to engage in business of real estate and make profits from this venture We accordingly find ourselves in agreement with the following findings of the Ld. CIT(A) :-
“3.6 Thus, what is required to be seen is what was the intention of the appellant firm when it acquired the plot of land which is under consideration. As clearly brought out in the facts, the said plot of land was purchased by the appellant firm with the primary objective of developing it and constructing a building thereon as part of the regular business of the appellant firm of the real estate development. This is clearly evident from the some of the clauses of the agreement through which the appellant firm has purchased the said plot of land. For instance, in one of the clauses it wag covenanted that the appellant firm would be entitled to submit the building plans to the local authorities for the proposed construction of the building on the said land etc. Thereafter, in fact, the appellant firm had submitted the application for approval over the plan of the building to be constructed and had obtained the required approval from Zilla Parishad, Thane in 2008. Therefore, the said plot of land had all the traits of the stock-in-trade of the regular business of the real estate development of the appellant firm.
ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders ….
3.8 The reliance has also been placed on several decisions of ITAT, Mumbai wherein the ITAT was required to decide whether on the basis of the facts of the case it could be said that the assessee has started the business of real estate development and, therefore, the land held by the assessee should be considered as having the characteristics of stock-in-trade. The ITAT examined that the assessee itself had taken lot of steps for the development of the property before it finally entered into a development agreement and entrusted the work of development to the third-party. These decisions are Vidhyavihar Containers Ltd. vs. DCIT [2011] 133 ITD 363 (Mumbai), Ramesh Abaji Walavaikar vs. Addl. CIT [2012] 54 SOT 15 (Mumbai) and Fardeen Khan vs. ACIT [2015] 58 taxmann.com 186 (Mumbai- Trib).
3.9 Though these cases of the ITAT were in the context of deciding whether the assessee which was engaged in the business of manufacturing earlier should be considered to have started the business of real estate development, the observations on the basis of which the final decision has been taken are relevant to the appellant's case under consideration. In the appellant's case also, the appellant itself had prepared the plans for the purpose of development of the plot of land under consideration and approached Zilla Parishad, Thane seeking permission to develop the said plot vide its application letter dated 15-05-2006. In fact, the permissions were also duly obtained vide order no. ZP/56/2008 dated 14-11-2008, the copy of which has been submitted by the appellant. Not only that but when the MMRDA put the reservations on the plot which ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders created hindrance to the proposed development, the appellant only approached the authority and initiated the process of removing them so for enable it to carry out the intended development. Thus, the facts of the appellant's case are similar to the facts of the aforesaid case. The only difference is that the appellant has been holding the plot of land under consideration as stock-in-trade since beginning and it was not held as the capital asset as it was in that case which was later on converted into stock-in-trade upon termination of manufacturing business. On this basis, the plot of land held by the appellant firm should be considered as in the nature of ‘stock-in-trade’ only.
3.10 With respect to the contention of the Assessing Officer that the appellant has not shown the land as stock-in-trade in the balance sheet but has been shown under loans and advances, the appellant has explained the reasons for the same stating that there were disputes which had arisen with respect to the legal title over the land due to which the concerned amounts were parked under the loans and advances by the appellant. In this regard, the useful reference can be made to the decision of the ITAT, Mumbai in the case of Prakash Gulabrai Chawla vs. ACIT [2019] 111 taxmann.com 307 (Mumbai - Trib.) wherein it has been held that merely because at the time of purchase of development rights, the assessee had not routed it through the Profit & Loss account, It cannot be the sole determining factor in deciding whether it should be treated as investment or stock- in-trade. It is well-settled that accounting treatment given in the books of account is not sacrosanct. Therefore, assessee’s claim of business income had to be considered after taking into ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders account other relevant facts and materials including the nature of business carried on by the assessee.
3.11 In view of this, the plot of land as held by the appellant firm which is under consideration should be considered as stock- in-trade of the appellant firm and any income arising from the same should be assessed as business income and not as capital gains. Accordingly, this Ground of Appeal is allowed.”
Having held so above, the next question to be answered, is whether any income can be said to have accrued, upon execution of the Development Agreement with M/s Anmol Associated in the relevant year in question.
The case of the Revenue is that, the execution of Development Agreement resulted in transfer of possession of land in terms of Section 53A of The Transfer of Property Act, 1882 and therefore there was a ‘transfer’ within the meaning of Section 2(47)(v) of the Act and accordingly income arising from this transaction is to be brought to tax in the relevant AY 2013-14. On this aspect, we note that, the question of examination of the meaning of term ‘transfer’ as set out in Section 2(47)(v) of the Act and the applicability of the decision of Chaturbhuj Dwarkadas Kapadia vs. CIT (supra) would arise only when the land in question is a ‘capital asset’ and therefore amenable to Section 45 of the Act. As held by us above, the land held by the assessee was in the nature of inventory and not capital asset, and therefore in our view, the provisions of Section 2(47)(v) read with Section 45 had no application in the present case. For this, we gainfully refer to the decision of ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders coordinate Bench of this Tribunal in the case of Ramesh Abaji Walavalkar Vs Addl. CIT (54 SOT 15) wherein it was held that the criteria laid down in Section 2(47)(v) deals with ‘transfer’ of ‘capital asset’ and not ‘stock-in-trade’ and therefore the taxability of the land held as stock-in-trade is to be determined dehors the provisions of Section 2(47)(v) of the Act. The Tribunal is noted to have held that, the sale of stock in trade occurs only when the consideration in the form of constructed area is actually received by the assessee. The relevant findings of the coordinate Bench are noted to be as follows :-
“17. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. As already held by us, the profit or gain arising from the transfer of capital asset i.e. land by way of conversion is chargeable to tax as the income of the assessee under the head "capital gains" of the year in which the said land now held as stock in trade was sold by the assessee. It is observed a similar issue had come up for consideration before the Co-ordinate Bench of the Tribunal in the case of Dy. CIT v. Crest Hotels Ltd. [2001] 78 ITD 213 (Mum.) wherein the capital asset comprising of land and building of the hotel business was converted by the assessee into stock in trade of the construction business. The said stock in trade was sold by the assessee in the later year and capital gain on conversion was offered to tax by the assessee in the year which the stock in trade was sold. This action of the assessee was upheld by the Tribunal holding that tax on capital gain would be levied in the same year in which business profit on sale of stock in trade accrued to the assessee as per the provisions of sec. 45(2). It was held that all the arguments ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders relating to conveyance, possession etc., which were generally related to transfer of capital asset, were rendered meaningless in such a case and the assessee having recognized business profit on sale of converted asset in the relevant year, tax on capital gain on conversion would also be levied in that year. In the present case, the sale of stock in trade was recognized by the assessee in the previous year relevant to assessment year 2005- 06 when the consideration in the form of constructed area was actually received by him and this being so, we hold, respectfully following the decision of the Co-ordinate Bench of the Tribunal in the case of Crest Hotels Ltd. (supra), that the capital gain on transfer of capital asset by way of conversion is chargeable to tax in assessment year 2005-06 as per the provisions of sec. 45(2). We, therefore, decide this issue in favour of the assessee and allow ground no. 2 of the assessee.
We note that, identical view also has been expressed by another coordinate Bench at Mumbai in the case of Fardeen Khan Vs ACIT (58 taxmann.com 186) wherein it was held as under :-
We find that the Assessing Officer had held that land was 'capital asset' and therefore, there is transfer within the meaning of Section 2(47)(v) of the Income-tax Act, 1961 ('Act') which provides that 'any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882. The Assessing Officer has mainly relied on the decision of the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra) to support his conclusion. As per ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders our considered view for application of section 2(47)(v) of the Act, it is essential that land should be a 'capital asset'. However, in the instant case the land no longer remained 'capital asset' as the series of activities undertaken by the assessee discussed hereinabove clearly show that the land had been converted into' stock-in-trade' in the year 2005 itself and not in the previous year relevant to A.Y. 2008-09. Thus the Assessing Officer and the CIT(A) have failed to correctly and truly appreciate the series of activities undertaken by the assessee and wrongly held that the assessee have converted land in the previous year relevant to A.Y. 2008-09.
It is further noted that, the assessee having treated the land as their inventory, has recorded the receipt from sale of constructed spaces as its revenues from business, following the recognized project completion method. It was brought to our notice that, the Developer had completed four (4) out of the eleven (11) buildings proposed to be constructed and handed over the assessee’s share in area in those four buildings. The assessee is noted to have sold their share of units and the gross revenues recognized in AY 2019-20 was Rs.7,83,41,000/-. It is therefore observed by us, that the assessee had ultimately also offered the revenues derived from exploitation of the land parcels to tax on accrual basis, under the head ‘Business Income’. It was also brought to our notice that, thereafter, the concerned local authority had issued stop work notice in 2019 and ordered demolition of construction work, which raised serious doubts on the certainty of accrual of any real income from this business activity. All these facts placed before us, therefore clearly supports the assessee’s case that, no ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders business income could be said to be actually accrued merely upon execution of development agreement, and that the same accrues only when the constructed spaces are completed and handed over to the assessee.
In view of the above facts and relying upon the decisions (supra), we uphold the Ld. CIT(A)’s findings to the extent that the provisions of Section 2(47)(v) were not applicable in the given facts of present case, and since the assessee held the land as inventory, the business income cannot be said to have accrued unless the consideration in form of constructed spaces is actually received. Since the assessee neither received its share in constructed space during the relevant year nor did it sell any constructed spaces in relevant year, no business income arises in AY 2013-14. The relevant findings of Ld. CIT(A), which we take note of, are as follows :-
“5.7 Further, the appellant's case is squarely covered by several decisions which have been relied upon. In the case of Dheeraj Amin vs. ACIT (Bangalore - Trib), the facts were identical with the facts of the appellant's case. In this case, it was held that once land is held as stock in trade, it ceases to be a 'capital asset' u/s 2(14) and thus, provisions regarding 'transfer' and 'capital gains' are not attracted. On this basis, the decisions of Karnataka HC in Dr T K Dayalu and Bombay HC in Chaturbhuj Kapadia which were in the context of capital gains & 'transfer' u/s 2(47) were held to have been not relevant to decide the year of taxability. It was further held that against land (held as stock in trade) assessee received "right to sell" constructed area, which ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders would again be in the nature of "stock in trade" for assessee's business. It was observed that the principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, irrespective of certainty to make such profits. On this basis, it was held that business profit from sale of such rights in constructed area taxable only when such rights are actually exercised by the assessee and until such rights in constructed area are sold, it would be regarded as inventory in the business and shall be valued at cost price. Similar is the ratio of the other decisions which have been relied upon by the appellant. The other cases which are in favour of the appellant wherein a view has been taken the business income cannot be taxed till the time the assessee receives his share in the constructed area from the developer are ITO Vs Vilas Babanrao Rukari (HUF) [2018] 93 taxmann.com 465 (Pune - Trib.), Ramesh Abaji Walavalkar vs. Addl. CIT [2012] 54 SOT 15 (Mumbai), Dy. CIT v. Crest Hotels Ltd. (2001) 78 ITD 213 (Mum.), DCIT vs. Clean City Estates Pvt. Ltd. (ITA No. 1624/Hyd/2016) — dated 21-2-2020….
5.8 In view of this, I agree with the appellant that the business income arising from the development agreement which was executed during the year under consideration cannot be brought to tax till the time the appellant receives its share in the constructed area and sells the same. Since the appellant has neither received his share of 30% in the total constructed area nor it has been sold during the year under consideration, no business income should be added to the appellant's income for ITA Ns. 2404/Mum/2023 A.Y. 2013-14 Shreyas Builders this year. In view of this, this Additional Ground of Appeal is allowed.”
In view of the above findings, the alternate contention of the assessee that, the Development Agreement in question only granted permission to enter and construct to the Developer and that there was no transfer of possession and control over the land to invoke Section 2(47)(v) of the Act has been rendered academic in nature and therefore we do not return any findings on this aspect.
For the above set out reasons therefore, we confirm the Ld. CIT(A)’s order deleting the addition made by the AO by way of capital gains. Accordingly, all the grounds raised by the Revenue stands dismissed.
In the result, the appeal of Revenue is dismissed.