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Before: Shri Sanjay Arora & Shri Duvvuru RL Reddy
O R D E R PER BENCH: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 1, Coimbatore, dated 16.11.2015 relevant to the assessment year 2011-12, wherein, the only effective ground raised in the appeal is that the ld. CIT(A) has erred in confirming the addition of ₹.43,90,810/- from sale of lands treating the same as business income.
Brief facts of the case are that the assessee is an individual, engaged in the business of real estate, filed his return of income for the relevant year on 07.02.2012 admitting a total income of ₹.57,09,080/-. The return of income filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short]. Subsequently, the case of the assessee was taken up for scrutiny and notice under section 143(2) of the Act dated 22.08.2012 was issued and duly served on the assessee. In response thereto, the assessee filed all details as sought for. Further, in the assessee’s case, there was survey conducted 133A of the Act on 29.03.2011. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has sold 16,195 sq.ft. of house sites at Kovaipudur on various dates from 21.10.2010 to 31.03.2011 and claimed exemption under section 54F of the Act for purchase of residential house site at Parry Nagar. On verification of the return of income filed by the assessee, the Assessing Officer noticed that the assessee has offered an additional income of ₹.51,20,000/- admitted during the course of survey. Before the Assessing Officer the assessee submitted that the impugned land was disclosed in the fixed assets schedule and subsequently disclosed in the fixed assets schedule of the balance sheet and also reported in wealth tax return. From the details filed by the assessee, the Assessing Officer noticed that the impugned land transaction is not an isolated transaction and he was actively involved in real estate business in his individual capacity as well through his company M/s. Shajbas Constructions Pvt. Ltd., a real estate company. Accordingly, by holding that the transactions of the assessee are “an adventure in the nature of trade”, the entire income of ₹.43,90,810/- from the sale was brought to tax and rejected the claim of exemption under section 54F of the Act.
The assessee carried the matter in appeal before the ld. CIT(A). Considering the facts and circumstances of the case and by following the decision in the case of Raja J. Rameshwar Rao v. CIT [1961] 42 ITR 179 (SC), the ld. CIT(A) dismissed the appeal filed by the assessee.
On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the income out of the sale of land was only a capital gain and it cannot be treated as adventure in the nature of trade. Further, the assessee has disclosed the said lands sold in his balance sheet under Fixed Assets Schedule and not under Stock-in- Trade. Therefore, he prayed that the addition should be deleted.
On the other hand, the ld. DR strongly supported the orders of the authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee sold 16,195 sq.ft. of house sites at Kovaipudur on various dates from 21.10.2010 to 31.03.2011 and claimed exemption under section 54F of the Act for purchase of residential house site at Parry Nagar. The above said impugned property was purchased on 27.10.2006 in a single document and after developing the same into house sites, it was sold from 21.10.2010 to 31.03.2011 on sq.ft. basis to several persons. The original cost of land with development expenses was only ₹.4,46,861/- and the same was sold at more than 10 times the value at ₹.47,17,000/-. Admittedly, the assessee, in his individual capacity, is engaged in real estate business and also as Managing Director of M/s. Shajbas Construction Pvt. Ltd. Therefore, since the original intention of the assessee was to derive income from business, the entire income of the assessee at ₹.43,90,810/- was brought to tax. On appeal, by following the decision in the case of Raja J. Rameshwar Rao (supra), the ld. CIT(A) dismissed the appeal filed by the assessee by holding that the income of the assessee should be treated as business income in view of the above decision of the Hon’ble Supreme Court.
6.1 It shall be relevant to reproduce the said decision in Raja J. Rameshwar Rao v. CIT (supra), being relied upon by the Revenue: “5. In this appeal, we are only concerned with the first question, because it 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 the 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 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.” It may, again, be relevant to reproduce from the decision by the Larger Bench of the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC): page 596-597: “When section 2(4) of the Income-tax Act refers to an adventure in the nature of trade it clearly suggests that the transaction in question cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not only by all of them: and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade, provided at least some of the essential features of trade are present in the isolated or single transaction. If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it 'Would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as e.g., whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a design or purpose, the incidents associated with the purchase and resale, the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold it for some time and if a profitable offer is received 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 transaction being in the nature of trade. The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; 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 relevant factors and circumstances that determines the character of the transaction. In cases 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 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 inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted.” It was, accordingly, held as under: “Held, on the facts, that the Appellate Tribunal was right in inferring that the appellant knew that it would be able to sell the lands to the managed company whenever it thought it profitable so to do; that the appellant purchased the four plots of land with the sole intention of selling them to the mills at a profit which intention raised a strong presumption in favour of the view taken by the Tribunal ; and that the High Court was right in holding that the transaction in question was an adventure in the nature of trade.” 6.2 We may, next, examine the facts of the case; it being trite law that all the relevant facts and circumstances of the case are to be considered. The assessee, an individual, is in real estate business, buying and selling lands, including upon their development; plotting, etc., also undertaking construction business through a company, M/s. Shajbas Constructions Pvt. Ltd. (of which he is the Managing Director), which has promoted over 25 projects in and around Coimbatore, also at Madurai, Thirumangalam, Kumbakonam. In fact, several documents in respect of purchase of lands, as well as entries in the diaries; the same being unaccounted, were found during the course of survey proceedings under section 133A of the Act on the said company on 29.03.2011. He would, thus, only be acutely aware the development plan of the Coimbatore city, in the vicinity of which the subject land was purchased. In fact, it does not take much thought to discern the same, considering the manner in which it is expanding; the assessee’s business sense would only be heightened, being informed of finer details, in view of being in the relevant trade. The subject land was not only developed, but also divided into plots and sold to several persons as housing sites over a period of 5 ½ months, realizing over ten times the original cost (including development expenditure) in a span of 4 years. How could that be regarded as a mere transfer of a capital asset, i.e., from one form to another, which is what ‘capital gain’ essentially is. The nature and quality of the asset has itself undergone a change in the process. The element of trade or business is implicit or immanent in the transaction/s. Why, even the timing of buying and selling, as well as the form in which it is, is a result of business decisions and, thus, the transaction/s imbued with or has attributes of a business or adventure in the nature of trade. Only because the time lag between the purchase and sale/s is 4 years would not, by itself, imply that what is sold is a capital asset. Further, even if for the sake of argument the purchase of land is regarded as of a capital asset, there is nothing to prevent the assessee from, realizing its’ business potential, of which he could not but only be acutely aware, converting it into stock-in-trade of his business. The treatment by the assessee in his books of account, showing it as a fixed asset therein and, consequently, returning it as a part of his wealth (of which there is though no evidence) would, therefore, be of little consequence (ref: Sutlej Cotton Mills Limited vs. CIT [1979] 116 ITR 1 (SC)).
6.3 The assessee’s claim for exemption under section 54F of the Act stands, under the circumstances, in our view, rightly denied by the Revenue in-as-much as the gain arising on the sale of the housing sites is assessable as business income under section 28 of the Act. Accordingly, the ground raised by the assessee is dismissed.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced on the 13th October, 2017 at Chennai.