MEGA CITY DEVELOPMENT CORPORATION,CHENNAI vs. ACIT(OSD), CHENNAI

आदेश /O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These two appeals by different assessees are directed against different orders of the Commissioner of Income- tax(Appeals) for the assessment year 2012-13. Since, the issue in both the appeals is common, these are clubbed together, heard together and disposed of by this common order.

- - 3 ITA 3254 & 3255/Mds/16

3.1 The assessee is engaged in buying and selling of lands. The assessee purchased the lands and the assessment year 2011-12 was its first year of business operation and it was the investments made by the assessee in land. During the financial year 2011-12, the assessee sold these lands for gross consideration amounting to a sum of ₹ 20,19,53,770/- and deducted the original cost of investment of ₹28,80,675/- and net consideration amounting to ₹19,90,73,095/- which has been credited in the profit and loss account. According to assessee, since, the assessee owns these lands as ‘investment’, the gain arising out of this to be considered as a long term capital gains. However, this claim was rejected by the AO ignoring the assessee’s contention that the property has been held by the assessee as long term asset and since the assessee has continuously and consistently been purchasing the land and made it as layout on division of land into plots, hence the Learned Assessing Officer came to a conclusion that the sale of land is liable to be treated as business activity of the assessee and the income there from is treated as income from ‘profits and gains of the

- - 4 ITA 3254 & 3255/Mds/16

business’ and taxed accordingly. The AO treated the purchase of lands as business asset and ignored it as long term investment by the firm and treated the entire income as business income. Therefore, the assessee filed a letter on 17.3.2015 stating that the nature of the business of the firm is ‘investment in lands’ and ‘development of lands’ and to carry on business of real estate. The AO based on the ‘object clause’ of the Partnership Deed’ came to the conclusion that the assessee carried on the business and charged the income under the head ‘profits and gains’ of the business. Before the lower authorities, the assessee relied on the decision of the Tribunal, Hyderabad Bench in the case of DCIT v. M/s. Maheshwari Plaza Resorts Ltd., 2015 (4) TMI 98 ITAT Hyderabad to supports his view.

3.3 The AO has also disallowed an amount of ₹18,75,100/- towards professional charges due to the reason that no TDS certificates has been produced by the assessee as evidence of tax not being deducted on the professional charges. According to the assessee, the assessee in fact, deducted the tax and paid to the credit of

- - 5 ITA 3254 & 3255/Mds/16

the Central Government.Therefore, the assessee contended that the income on account of transfer of land has been charged under capital gains and the question of computation of income under business or profession does not arise. However, the AO rejected the claim of assessee. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the ld. Learned Commissioner of Income Tax(A). On appeal, the ld. Learned Commissioner of Income Tax(A) confirmed the order of A.O. Now, the assessee is in appeal before us.

- - 6 ITA 3254 & 3255/Mds/16

in the assessment year under consieration and offered the same

for income under the head ‘capital gains’. The ld. AR submitted

that when the land had been subjected to development and

plotting it out for sale, the AO opined that this constitutes a

business activity as the object of the partnership firm was to sell

the lands. At this juncture, according to the ld. AR, it is pertinent

to note that when the lands were brought in as ‘capital’, there

was no purchase of land and only the sale of land took place.

The AO treated the sale of land as business income on the

ground that when development activity took place, it is a

sufficient ground for treating the same as ‘business income’.

Further, the ld. AR submitted that year after year when the land

was shown as ‘fixed asset’ in the balance sheet and when there

is consistency that is followed by the assessee, which itself is a

sufficient ground to prove that the income offered under the head

‘capital gains’ gets justified. To support his view, he relied on the

decisions of the Hyderabad Bench in the case of DCIT v.

Maheshwari Plaza and Resorts Ltd. cited supra, wherein it was

held that ‘consistency is a virtue to be followed both the by the

assessee and the revenue”. The ld. AR also submitted that

- - 7 ITA 3254 & 3255/Mds/16

while rendering this decision, the Bench followed the Apex court

judgment in the case of Radhaswamy Satsang, 1991 (11) TMI 2

– (SC).

4.1 Further, the ld. AR contended that during the course of

appellate proceedings, it was brought to the notice of the first

appellate authority that balance sheet was prepared only to

arrive at the financial position of the assessee and after arriving

at the profit or loss, the same being divided amongst the partners

in their respective profit sharing ratio as per the partnership deed

which does not have any bearing on the total income, since, the

assessee offered the income under the head ‘capital gains’.

The ld. AR further contended that no other purchase of land had

taken place and what was originally brought in as capital by the

partners in the form of land is being sold. Therefore, the ld. AR

submitted that the lower authorities are not justified in dismissing

the case of the assessee.

CIT(Appeals).

- - 8 ITA 3254 & 3255/Mds/16

on record. The issue as to whether income that is realised from

the sale of land is chargeable to Income-tax as capital gains or,

otherwise, as income from business. This has been the subject-

matter of a considerable amount of judicial precedent. In Janki

Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) the Supreme

Court laid down the following guidelines (head-note) :

"If a transaction is related to the business which is normally carried

on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is pur chased and sub-divided, altered, treated, or repaired and sold, or is converted into a different commodity and sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade."

594 (SC), the Supreme Court noted that several factors

assumed relevance including (i) whether the purchaser was a

- - 9 ITA 3254 & 3255/Mds/16

trader and the purchase of the commodity and its resale were

allied to his usual trade or business or incidental to it ; (ii) the

nature and extent of the transaction involved in the purchase

and sale; (iii) acts subsequent to the purchase for the

improvement of the quality of the subject-matter ; (iv) any act

prior to the purchase showing a design or purpose, the

incidents associated with the purchase and resale and the

similarity of the transaction to operations usually associated

with trade or business ; (v) the repetition of the transaction ; and

(vi) the element of pride of possession.

Bench of this court, while holding that no single test or formula

can be applied in determining whether a transaction involving

purchase and sale of land is an adventure in the nature of trade

observed that generally speaking, the original intention of the

party in purchasing the property, the magnitude of the

transaction of purchase, the nature of the property, the length of

its ownership and holding, the conduct and subsequent

dealings of the assessee in respect of the property, the manner

10 - - ITA 3254 & 3255/Mds/16

of its disposal and the frequency and multiplicity of transactions

afforded valuable guides in determining whether the assessee

was carrying on a trading activity and whether a particular

transaction should be stamped with the character of a trading

adventure.

(Delhi), a Division Bench of the Delhi High Court dealt with a

case where the assessee who derived her income from the

medical profession had acquired certain properties as an asset

for constructing a nursing home. Subsequently, after a laps of

time, the assessee carried out construction on the property.

The Tribunal had noted that after making the purchase, the

assessee had disposed of the property nearly twenty years

thereafter. No prudent person, the Tribunal held, would have

waited for such a long period of time if it was a business

proposition. The gain resulting from the sale transaction was

treated as capital gains and not as income arising out of an

adventure in the nature of trade. The Division Bench of the

Delhi High Court, relying, inter alia, upon the judgment of the

11 - - ITA 3254 & 3255/Mds/16

Supreme Court in G. Venkataswami Naidu (supra), affirmed the

view of the Tribunal. Similarly, in a decision of the Punjab and

Haryana High Court in CIT v. Sushila Devi Jain [2003] 259 ITR

671 (P&H), the assessee had acquired certain property under

the will of her husband. The property consisted of a large tract

of land which was sold out in part. The High Court held that the

relevant test was to find out the intention of the assessee at the

time of the purchase of the land. The assessee had never

purchased her land since it had devolved on her through

testamentary succession. The land was sold in parts because

the huge area could not be sold in one transaction and such an

activity was held not to amount to trade or business within the

meaning of the Act.

purchased the long track of land and made it as plots. As per the

object clause of partnership deed, the business of the assessee

to develop the continuous land brought in by the partners of the

firm as their capital into plot and constructed residential premises

on the said land. The gist of the Partnership deed is as under:-

12 - - ITA 3254 & 3255/Mds/16

“6. It can be seen from the Partnership Deed that partners

have held the lands of around 20.510 acres situated an

Karanat Village and brought the same into the Firm as

their capital and booked in the accounts of the firm, at the

original cost price of the! land to the partners. Once the

lands were brought into the firm, it would be 4 trading

asset of the partnership firm, even if it is shown as ‘Fixed

Assets’ in the Balance Sheet, since the firm is constituted

only with an intention to develop the contiguous lands

held in the hands of the partners into Plot and construct

residential apartments etc. Further, once the partners

brought in the lands into the firm as Capital, the land

loses its identity as fixed assets and it will become the

stock-in-trade of the firm due to its nature of trade,

with M/s.ETA Stark, Property Developers Ltd.; Chennal,

for the development of the schedule property into

residential layouts/approved plots/villas and for obtaining

13 - - ITA 3254 & 3255/Mds/16

necessary permission/approval from DTCP. The gist of

the agreement is as under:

“1. that the parties hereby entered into this agreement for

the purpose of developing schedule property into

residential layouts/approved plots/villas by obtaining

necessary permissions/approval from DTCP.

second party as the Developer for the residential layout to

be developed in the schedule property.....

project as “ETA The Good Life / WINGHAVEN Garden”

plots and sold the same to various parties, not as a single unit, shows

that the assessee has dealt with the impugned lands as stock-in-

trade of the business, only with an intention earn profit. The

assesse’s activity squarely covers the judgement of the Hon’bl

Supreme Court as cited above on the reason that the transaction is

14 - - ITA 3254 & 3255/Mds/16

related to the business, which is normally carried on by the assessee,

though not directly; part of it, an intention to earn upon an adventure

in the nature of trade may readily be inferred.

had been shown in the Balance Sheet as ‘Fixed Assets’ and therefore

the sale proceeds on the sale of the lands had been computed and

offered under Capital Gains, has not been accepted and the sale

proceeds on the sale of the lands by the firm is treated as business

income.

lower authorities has based on no evidence or whether misdirected

itself in law. Considering the totality of the facts of the case and the

nature of business carried on by the assessee, it is not possible to

hold that the assessee is treated the land as investments. In other

words, though it is presumed, it was treated as investments it does

not alternate the nature of the activities carried out by the assessee.

It is only the business activity in land and gains arising out of the sale

of such land to by making plots is nothing but adventure nature of

15 - - ITA 3254 & 3255/Mds/16

trade and income there from to be considered as profit from business only in term sof Sec.28 of the Act. Accordingly, we are completely agreement with the findings of Ld.CIT(A) on this issue and the appeal filed by the assessee is rejected.

Sd/- Sd/- (जी. पवन कुमार) (चं� पूजार�) (G. Pavan Kumar) (Chandra Poojari) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, �दनांक/Dated, the 21st June, 2017. K S Sundaram आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5.�वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF

आयकर अपील�य अ�धकरण, ‘डी’ �यायपीठ, चे�नई IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI

�ी चं� पूजार�, लेखा सद�य एवं �ी जी. पवन कुमार, �या�यक सद�य के सम�

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER

आयकर अपील सं./ITA No. 3254/Mds/2016 �नधा�रण वष� /Assessment Year : 2012-13

KAKB Developers, The Income-tax Officer Now 10 & 11, Dr. Radhakrishnan v. 3(4), Corporate Range – 5, Salai, Chennai City Centre, Chennai - 34. 4th floor, Mylapore, (��यथ�/Respondent) Chennai – 600 004. PAN AASFM3707C (अपीलाथ�/Appellant)

आयकर अपील सं./ITA No. 3255/Mds/2016 �नधा�रण वष� /Assessment Year : 2012-13

Mega City Development The Assistant Commissioner of Corporation, v. Income-tax (OSD), 10 & 11, Dr. Radhakrishnan Corporate Range – 5, Salai, Chennai City Centre, Chennai - 34. 4th floor, Mylapore, (��यथ�/Respondent) Chennai – 600 004. PAN AAKFM7436Q (अपीलाथ�/Appellant)

Assessees by : Shri N.C. Prabhakar, Advocate Department by : Shri Nandakumar, JCIT

सुनवाई क� तार�ख/Date of Hearing : 20.04.2017 घोषणा क� तार�ख/Date of Pronouncement : 21.06.2017

- - 2 ITA 3254 & 3255/Mds/16

आदेश /O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These two appeals by different assessees are directed against different orders of the Commissioner of Income- tax(Appeals) for the assessment year 2012-13. Since, the issue in both the appeals is common, these are clubbed together, heard together and disposed of by this common order.

- - 3 ITA 3254 & 3255/Mds/16

3.1 The assessee is engaged in buying and selling of lands. The assessee purchased the lands and the assessment year 2011-12 was its first year of business operation and it was the investments made by the assessee in land. During the financial year 2011-12, the assessee sold these lands for gross consideration amounting to a sum of ₹ 20,19,53,770/- and deducted the original cost of investment of ₹28,80,675/- and net consideration amounting to ₹19,90,73,095/- which has been credited in the profit and loss account. According to assessee, since, the assessee owns these lands as ‘investment’, the gain arising out of this to be considered as a long term capital gains. However, this claim was rejected by the AO ignoring the assessee’s contention that the property has been held by the assessee as long term asset and since the assessee has continuously and consistently been purchasing the land and made it as layout on division of land into plots, hence the Learned Assessing Officer came to a conclusion that the sale of land is liable to be treated as business activity of the assessee and the income there from is treated as income from ‘profits and gains of the

- - 4 ITA 3254 & 3255/Mds/16

business’ and taxed accordingly. The AO treated the purchase of lands as business asset and ignored it as long term investment by the firm and treated the entire income as business income. Therefore, the assessee filed a letter on 17.3.2015 stating that the nature of the business of the firm is ‘investment in lands’ and ‘development of lands’ and to carry on business of real estate. The AO based on the ‘object clause’ of the Partnership Deed’ came to the conclusion that the assessee carried on the business and charged the income under the head ‘profits and gains’ of the business. Before the lower authorities, the assessee relied on the decision of the Tribunal, Hyderabad Bench in the case of DCIT v. M/s. Maheshwari Plaza Resorts Ltd., 2015 (4) TMI 98 ITAT Hyderabad to supports his view.

3.3 The AO has also disallowed an amount of ₹18,75,100/- towards professional charges due to the reason that no TDS certificates has been produced by the assessee as evidence of tax not being deducted on the professional charges. According to the assessee, the assessee in fact, deducted the tax and paid to the credit of

- - 5 ITA 3254 & 3255/Mds/16

the Central Government.Therefore, the assessee contended that the income on account of transfer of land has been charged under capital gains and the question of computation of income under business or profession does not arise. However, the AO rejected the claim of assessee. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the ld. Learned Commissioner of Income Tax(A). On appeal, the ld. Learned Commissioner of Income Tax(A) confirmed the order of A.O. Now, the assessee is in appeal before us.

- - 6 ITA 3254 & 3255/Mds/16

in the assessment year under consieration and offered the same

for income under the head ‘capital gains’. The ld. AR submitted

that when the land had been subjected to development and

plotting it out for sale, the AO opined that this constitutes a

business activity as the object of the partnership firm was to sell

the lands. At this juncture, according to the ld. AR, it is pertinent

to note that when the lands were brought in as ‘capital’, there

was no purchase of land and only the sale of land took place.

The AO treated the sale of land as business income on the

ground that when development activity took place, it is a

sufficient ground for treating the same as ‘business income’.

Further, the ld. AR submitted that year after year when the land

was shown as ‘fixed asset’ in the balance sheet and when there

is consistency that is followed by the assessee, which itself is a

sufficient ground to prove that the income offered under the head

‘capital gains’ gets justified. To support his view, he relied on the

decisions of the Hyderabad Bench in the case of DCIT v.

Maheshwari Plaza and Resorts Ltd. cited supra, wherein it was

held that ‘consistency is a virtue to be followed both the by the

assessee and the revenue”. The ld. AR also submitted that

- - 7 ITA 3254 & 3255/Mds/16

while rendering this decision, the Bench followed the Apex court

judgment in the case of Radhaswamy Satsang, 1991 (11) TMI 2

– (SC).

4.1 Further, the ld. AR contended that during the course of

appellate proceedings, it was brought to the notice of the first

appellate authority that balance sheet was prepared only to

arrive at the financial position of the assessee and after arriving

at the profit or loss, the same being divided amongst the partners

in their respective profit sharing ratio as per the partnership deed

which does not have any bearing on the total income, since, the

assessee offered the income under the head ‘capital gains’.

The ld. AR further contended that no other purchase of land had

taken place and what was originally brought in as capital by the

partners in the form of land is being sold. Therefore, the ld. AR

submitted that the lower authorities are not justified in dismissing

the case of the assessee.

CIT(Appeals).

- - 8 ITA 3254 & 3255/Mds/16

on record. The issue as to whether income that is realised from

the sale of land is chargeable to Income-tax as capital gains or,

otherwise, as income from business. This has been the subject-

matter of a considerable amount of judicial precedent. In Janki

Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC) the Supreme

Court laid down the following guidelines (head-note) :

"If a transaction is related to the business which is normally carried

on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is pur chased and sub-divided, altered, treated, or repaired and sold, or is converted into a different commodity and sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade."

594 (SC), the Supreme Court noted that several factors

assumed relevance including (i) whether the purchaser was a

- - 9 ITA 3254 & 3255/Mds/16

trader and the purchase of the commodity and its resale were

allied to his usual trade or business or incidental to it ; (ii) the

nature and extent of the transaction involved in the purchase

and sale; (iii) acts subsequent to the purchase for the

improvement of the quality of the subject-matter ; (iv) any act

prior to the purchase showing a design or purpose, the

incidents associated with the purchase and resale and the

similarity of the transaction to operations usually associated

with trade or business ; (v) the repetition of the transaction ; and

(vi) the element of pride of possession.

Bench of this court, while holding that no single test or formula

can be applied in determining whether a transaction involving

purchase and sale of land is an adventure in the nature of trade

observed that generally speaking, the original intention of the

party in purchasing the property, the magnitude of the

transaction of purchase, the nature of the property, the length of

its ownership and holding, the conduct and subsequent

dealings of the assessee in respect of the property, the manner

10 - - ITA 3254 & 3255/Mds/16

of its disposal and the frequency and multiplicity of transactions

afforded valuable guides in determining whether the assessee

was carrying on a trading activity and whether a particular

transaction should be stamped with the character of a trading

adventure.

(Delhi), a Division Bench of the Delhi High Court dealt with a

case where the assessee who derived her income from the

medical profession had acquired certain properties as an asset

for constructing a nursing home. Subsequently, after a laps of

time, the assessee carried out construction on the property.

The Tribunal had noted that after making the purchase, the

assessee had disposed of the property nearly twenty years

thereafter. No prudent person, the Tribunal held, would have

waited for such a long period of time if it was a business

proposition. The gain resulting from the sale transaction was

treated as capital gains and not as income arising out of an

adventure in the nature of trade. The Division Bench of the

Delhi High Court, relying, inter alia, upon the judgment of the

11 - - ITA 3254 & 3255/Mds/16

Supreme Court in G. Venkataswami Naidu (supra), affirmed the

view of the Tribunal. Similarly, in a decision of the Punjab and

Haryana High Court in CIT v. Sushila Devi Jain [2003] 259 ITR

671 (P&H), the assessee had acquired certain property under

the will of her husband. The property consisted of a large tract

of land which was sold out in part. The High Court held that the

relevant test was to find out the intention of the assessee at the

time of the purchase of the land. The assessee had never

purchased her land since it had devolved on her through

testamentary succession. The land was sold in parts because

the huge area could not be sold in one transaction and such an

activity was held not to amount to trade or business within the

meaning of the Act.

purchased the long track of land and made it as plots. As per the

object clause of partnership deed, the business of the assessee

to develop the continuous land brought in by the partners of the

firm as their capital into plot and constructed residential premises

on the said land. The gist of the Partnership deed is as under:-

12 - - ITA 3254 & 3255/Mds/16

“6. It can be seen from the Partnership Deed that partners

have held the lands of around 20.510 acres situated an

Karanat Village and brought the same into the Firm as

their capital and booked in the accounts of the firm, at the

original cost price of the! land to the partners. Once the

lands were brought into the firm, it would be 4 trading

asset of the partnership firm, even if it is shown as ‘Fixed

Assets’ in the Balance Sheet, since the firm is constituted

only with an intention to develop the contiguous lands

held in the hands of the partners into Plot and construct

residential apartments etc. Further, once the partners

brought in the lands into the firm as Capital, the land

loses its identity as fixed assets and it will become the

stock-in-trade of the firm due to its nature of trade,

with M/s.ETA Stark, Property Developers Ltd.; Chennal,

for the development of the schedule property into

residential layouts/approved plots/villas and for obtaining

13 - - ITA 3254 & 3255/Mds/16

necessary permission/approval from DTCP. The gist of

the agreement is as under:

“1. that the parties hereby entered into this agreement for

the purpose of developing schedule property into

residential layouts/approved plots/villas by obtaining

necessary permissions/approval from DTCP.

second party as the Developer for the residential layout to

be developed in the schedule property.....

project as “ETA The Good Life / WINGHAVEN Garden”

plots and sold the same to various parties, not as a single unit, shows

that the assessee has dealt with the impugned lands as stock-in-

trade of the business, only with an intention earn profit. The

assesse’s activity squarely covers the judgement of the Hon’bl

Supreme Court as cited above on the reason that the transaction is

14 - - ITA 3254 & 3255/Mds/16

related to the business, which is normally carried on by the assessee,

though not directly; part of it, an intention to earn upon an adventure

in the nature of trade may readily be inferred.

had been shown in the Balance Sheet as ‘Fixed Assets’ and therefore

the sale proceeds on the sale of the lands had been computed and

offered under Capital Gains, has not been accepted and the sale

proceeds on the sale of the lands by the firm is treated as business

income.

lower authorities has based on no evidence or whether misdirected

itself in law. Considering the totality of the facts of the case and the

nature of business carried on by the assessee, it is not possible to

hold that the assessee is treated the land as investments. In other

words, though it is presumed, it was treated as investments it does

not alternate the nature of the activities carried out by the assessee.

It is only the business activity in land and gains arising out of the sale

of such land to by making plots is nothing but adventure nature of

15 - - ITA 3254 & 3255/Mds/16

trade and income there from to be considered as profit from business only in term sof Sec.28 of the Act. Accordingly, we are completely agreement with the findings of Ld.CIT(A) on this issue and the appeal filed by the assessee is rejected.

Sd/- Sd/- (जी. पवन कुमार) (चं� पूजार�) (G. Pavan Kumar) (Chandra Poojari) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, �दनांक/Dated, the 21st June, 2017. K S Sundaram आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5.�वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF