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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI B.R.BASKARAN & SHRI RAMLAL NEGIShri Sanjay J. Ahuja,
The appeal filed by the assessee is directed against the order dated 14- 07-2014 passed by Ld CIT(A)-30, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the decision taken by the AO in respect of computation of capital gain and disallowance of depreciation on windmill.
The facts relating to the above said issues are stated in brief. The assessee is proprietor of M/s Sanjay Ahuja Property Trade and M/s Sanjay Ahuja Property trade wind mill. He filed his return of income declaring NIL income. The AO noticed that the assessee has credited a sum of Rs.1,44,90,542/- as profit on sale of land and has offered the same as business income. The AO rejected the claim of the assessee that he is a trader in properties and accordingly took the view that the profit on sale of property is assessable as Capital Gain. The AO also applied the provisions of sec.50C and accordingly enhanced the amount of Sale consideration. The AO also disallowed the claim of payment of compensation of Rs.47,52,000/- against the profit on sale of property. The AO also noticed that the assessee has installed a Wind Mill during the year under consideration. The AO noticed that the assessee has claimed higher rate of depreciation of 80% on all the expenses incurred for installing the machinery. The AO took the view that the higher rate of depreciation is admissible on Wind Mill assembly and Blades and not on other items. Accordingly he restricted the higher rate of depreciation of 80% on the above said items and allowed depreciation at normal rate of 15% on the remaining items.
The Ld CIT(A) confirmed the order passed by the AO on the above said issues and hence the assessee has filed this appeal before us.
The first issue relates to the head under which the profit arising on sale of land is assessable. The facts relating to the above said issue has been narrated as under by the assessee before the AO:-
“The assessee has purchased the rights in Tenanted building namely “Twilight”, a G + two storey building, consisting of 725 Sq. Yards situated at Bandra being Plot No.401 of Town Planning Scheme III of Bandra being new Survey No.F/63, Registration Sub district Bandra being Plot No.401 on 15th Road, Bandra from the landlord Mr. Noel Richard Pereira through a conveyance deed dated 12th Day of October,
2004 for a consideration of Rs.10.00 lacs. The assessee further stated that the assessee subsequently entered into a joint venture agreement for redevelopment of the tenanted building with one Mr. Sumeet Gidwani on 18.11.2004. Due to dispute between tenants, the assessee moved court for vacating the tenants and after two years of persuation, there was no solution. Therefore, Mr. Sumeet Gidwani quit the joint venture through a deed of cancellation dated 10-10-2008. It is further stated that the assessee has to pay an amount of Rs.47,52,000/- to Mr. Sumeet Gidwani for relinquishment of his right. The assessee being desperate with all the above facts started searching for a prospective buyer who can buy the rights in tenanted property from the assessee on “as is where is” basis along with legal case to proceed further. Therfore, the property has been ultimately sold to M/s Starlight Hospitality Pvt Ltd one of the Group company of M/s Diwan Builders, for a consideration of Rs.2 crores, vide deed of convenuance on 28.05.2009.”
The assessee also submitted to the AO that he has been purchasing shops and renting them out for commercial exploitation and accordingly claimed that he is dealing in property business regularly.
However, the AO took the view that the assessee has purchased the property in 2004 and sold it in 2010, meaning thereby, the assessee has intended to hold the property for some time and then sell it at profit. Accordingly, the AO took the view that the assessee has held the land as a Capital asset and accordingly assessed the profit under the head Capital gains. Since the stamp duty value shown in the conveyance deed was Rs.5.27 crores, the AO adopted the same u/s 50C of the Act.
We heard the parties on this issue. The question before us is the head of income under which the Profit arising on sale of land is assessable. There should not be any dispute that the answer to the same would depend upon the fact as to whether the assessee held the land as his Capital asset or as his Trading asset. The contention of the assessee is that he held the same as his trading asset and further he was carrying on activities in real estate and he has also maintained separate books of account. However, the AO has taken the view that the assessee has held the asset as Capital asset, since the intention of the assessee was held by the AO to be of making profit by holding the same for some time and then sell it.
Before us, the Ld A.R placed his reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of Smt. Bhanumati A Sanghavi Vs. CIT (1979)(119 ITR 0069) to contend that the assessee has held the property as his commercial asset only. The following observations made by the Hon’ble jursdictional High Court would be relevant to understand the points that should be tested to determine the nature of asset.
“In connection with this submission, our attention was drawn to the observations to be found in Janki Ram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC) : TC12R.356. It was observed by the Supreme Court in the above decision that the question whether profit in a transaction had arisen out of an adventure in the nature of trade was a mixed question of law and fact. It was further observed that the nature of the transaction must be determined on a consideration of all the facts and circumstances which are brought on the record of the IT authorities. The relevant observations which need not be extracted are to be found at pages 24 to 26 of the ITR. In Janki Ram's case (supra), it was observed that barring the expectation of profit and realisation of profit by sale of the property, there was no evidence bearing on the intention with which the assessee had purchased the property. It was submitted that the matter before us was identical and a similar conclusion was required to be reached. The Supreme Court had occasion to consider a similar question in a later decision in P.M. Mohammed Meerakhan vs. CIT (1969) 73 ITR 735 (SC) : TC12R.383. It has been observed in the aforesaid decision that it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction.” We notice that the impugned question should be decided on the basis of all facts and circumstances which are brought on record.
In the instant case, we notice that the assessee has purchased rights in a tenanted property in the impugned building on 12-10-2004 from the land lord. Immediately thereafter, i.e., on 18.11.2004 (about a month), the assessee entered into a joint venture agreement with Mr. Sumeet Gidwani for redevelopment of property. Hence, the intention at the date of purchase was to redevelop the property and sell it. However, the above said plan could not be executed, since legal disputes arose between the tenants and since the matter was getting prolonged, the Joint venture agreement was agreed to be terminated on 10-10-2008 (after four years) and Shri Sumeet Gidwani was constrained to quit the Joint venture by taking compensation. The events narrated above show that the assessee was pursuing the matter of redevelopment of property, which also shows that the intention of the assessee was to take this activity as his business venture. Ultimately the assessee chose to get rid of this venture and hence sold the property in the year 2009.
We notice that the assessing officer has taken cognizance of date of purchase and date of sale only in order to determine the intention of the assessee. The AO also took the view that the impugned transaction was an isolated transaction. Following observations made by the AO are relevant in this regard:-
“.....And the tenanted property was purchased in 2004. There was hardly any other property purchased or sold by the assessee after that date, even though the assessee is claimed that he has purchased one more property in May 2010. This is so, because the assessee sold the above tenanted building in the current year, the proceeds must have been invested in another property in May, 2010. This alone will not prove that the assessee is in the business of buying and selling property frequently. The first property was purchased in 2004 and sold in 2010 this clearly indicates that the assessee is just a genuine investor in real estate and nothing more, from the proceeds he bought another property subsequently. Therefore, the claim of the assessee that he deals in property business has any relevance. The assessee has not shown any business income from the property deal in the earlier years nor shown anything in the subsequent year also. As has been discussed earlier, the Pune property is rented out and assessee earning the rent and the same has been declared as business income. However, the same ought to have shown as income from House Property, this issue has been dealt separately. The assessee purchased the property with an intention to hold it for some time and enjoys its income and then sells it at a profit, it would be clear case of capital accretion and not profit from an adventure in the nature of trade....” We notice that the AO did not consider or discuss anything about the joint venture agreement entered by the assessee for development of property. The Ld CIT(A) upheld the view taken by the AO only for the reason that the assessee did not actually exploit the property commercially. Following observations made by Ld CIT(A) at page 21 in para 3.3.4 make this point clear:-
“.....Thus from the stage when the property was purchased by the appellant from Mr. Noel Pereira and sold to Starlight Hospitality Pvt Ltd, it was never commercially exploited by the appellant so as to fall under the definition of “Business”. The Joint venture agreement with Mr. Gidwani was a failed adventure which never took off and cannot be characterised as abusiness venture. The appellant upto the date of the sale of the property to M/s Starlight Hospitality Pvt Ltd was the sole owner of the property which he purchased for Rs.10 lac and sold it for Rs.2 crores. It is also important to note here that the property was already under litigation when the appellant filed a suit before the Bombay High Court for ejection of tenants from the property and Shri Gidwani opted out of the venture vide deed of cancellation on the ground that the above property could not be commercially exploited.”
The Ld A.R contended that the intention of the assessee at the time of purchase of property is relevant and even a single transaction could be a case of adventure in the nature of trade. In this regard, he placed reliance on the decision rendered by Hon’ble Punjab & Haryana High Court in the case of Harbans Singh Vs. CIT (1981)(132 ITR 0077), wherein it was held that the transaction of purchase and development of land with a view to resell, though a single transaction constituted adventure in the nature of trade giving rise to chargeable business income. It is pertinent to note that the Hon’ble Punjab and Haryana High Court has followed the principles laid down by Hon’ble Supreme Court in the case of G.Venkataswami Naidu & Co. Vs. CIT (1959)(35 ITR 594) and relevant discussions are extracted below, for the sake of convenience:-
“The criteria to determine as to when a receipt by sale of land would be a revenue receipt or capital receipt was laid down by the Supreme Court in G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC), in the following terms (headnote) : "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 profits 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.
4. 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." Again, in Raja J. Rameshwar Rao vs. CIT (1961) 42 ITR 179 (SC) it was ruled (headnote) : "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 bought it, but in parcels, he is dealing with land as his stock-in- trade, he is carrying on business and making profit.”
5. The present cases are, therefore, fully covered by the rule laid down in Raja J Rameshwar Rao’s case (supra) because here also, according to the facts found, the assessee soon after purchasing the land developed it into residential sites and started selling plots within two years of the purchase. The conclusion on these facts would be irresistible that he acquired the land with a view to selling it later on after developing it, and the activity, therefore, can be described only as business venture.” In the case of G.Venkataswami Naidu & Co. case, the assessee therein purchased the four plots during two years with the sole intention to sell them to the mills at a profit at a later date and this intention was held to be the deciding factor in holding that it was a case of adventure in the nature of trade. In the instant case also, we have noticed earlier that the assessee was not idle after purchasing the land. Before expiry of two months period from the date of purchase, he has entered into a Joint Venture Agreement for development of the property, which fact, in our view, shows that the intention of the assessee was not to keep the property as a Capital asset, but to exploit the same as a commercial asset with a view to make the profit. The subsequent legal complications have paralysed the project of the assessee and hence the project could not be executed. These facts have not been disputed and hence we are of the view that the Ld CIT(A) was not justified in holding that the impugned asset is a capital asset for the reason that it was not actually exploited commercially. In our view, “actual exploitation” should not the lone deciding factor. In our view the conduct of the assessee, which is discussed above, would show that the assessee has intended to commercially exploit the property by developing it and he has been pursuing the same thereafter for many years. Hence, in our considered view, the intention of the assessee, from the very beginning, was to exploit the property as a commercial asset and not to hold it as a Capital asset. Accordingly we are of there is merit in the claim of the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the profit arising on sale of impugned property as business income of the assessee.
The next issue contested by the assessee was with regard to application of provisions of sec. 50C of the Act to the impugned transaction. The AO applied the provisions of section 50C, since he held the property as a capital asset. The ld CIT(A) also upheld the same. In the preceding paragraphs, we have set aside the above said view taken by the tax authorities and we have held that that the impugned property was not a capital asset. Hence the question of application of provisions of sec. 50C does not arise. Accordingly we set aside the orders passed by the tax authorities on this issue.
The next issue contested by the assessee relates to the disallowance of claim for deduction of Rs.47.52 lakhs paid by the assessee to Shri Gidwani upon cancellation of Joint Venture Agreement. The assessee paid the above said amount on cancellation of the agreement and claimed the same as deduction. Since the AO considered the property as a capital asset and since the income tax return details of the recipient were not filed, the AO disallowed the claim. The Ld CIT(A) has also confirmed the same.
We have heard the parties on this issue and perused the record. A perusal of the order passed by Ld CIT(A) would show that the tax authorities are not disputing the existence of Joint Venture agreement and the cancellation thereof. In fact, the assessee has furnished copy of both the agreements in the paper book and they have also been filed before the tax authorities. We have earlier held that the assessee has carried out the activity of purchase of property as a commercial venture and he has also paid the compensation on cancellation of the Joint Venture Agreement. Hence, in our view, the compensation was paid by the assessee in the course of carrying on his commercial activities and the same would go to increase the value of stock in trade, being the property here. Accordingly we direct the AO to treat the same as incremental cost to stock in trade and compute the profit accordingly.
The last issue contested by the assessee relates to the rate of depreciation admissible on Wind Mill accessories. The assessee had capitalised expenditure on Tower, Civil foundation, Erection & Commissioning, Consultancy fee, Freight charges, Finance charges, Warranty expenses etc as part of Wind Mill cost and claimed depreciation @ 80%. The AO however allowed depreciation on the above said items at 15% and allowed depreciation at 80% only on Windmill assembly and blades. The ld CIT(A) also confirmed the same.
The Ld A.R submitted that the claim of the assessee is fully supported by the following decisions:-
(a) The CIT, Pune Vs. Cooper Founary Pvt Ltd (ITA No.1326 of 2010)(Bom) (b) CIT Vs. K K Enterprises (2014)(108 DTR (Raj) 0109) (c) ACIT Vs. Suma Shilpa Limited (2015)(44 CCH 0514)(Pune)
We heard Ld D.R and perused the record. The Hon’ble Rajasthan High Court has held in the case of K K Enterprises (supra) that the cost incurred in civil work and foundation, electrical items, components in installation and common power evacuation while installing windmills, which have no use other than for the purpose of the functioning of the windmill would become closely interconnected and are part and parcel of the windmill and, therefore, eligible for higher rate of depreciation.
The Hon’ble jurisdictional Bombay High Court has held in the case of Cooper Foundary Pvt Ltd (supra) that the expenditure incurred on cement foundation or reinforced cement concrete foundation is to be included in the cost of the windmill while granting depreciation at 80% on the windmill. While upholding the view taken by the Tribunal, the Bombay High Court noticed that the Tribunal has followed the decision rendered by it in the case of CIT Vs. Herdilla Chemicals Ltd (1995)(216 ITR 742), which was, in turn, rendered by following the decision rendered by Hon’ble Supreme Court in the case of Challapalli Sugars Ltd Vs. CIT (98 ITR 167), wherein it was held that the expenses relating to installation and even interest on borrowed capital for acquiring plant and machinery should be treated as part of cost of machinery.
In the instant case, we notice that the consultancy fee, freight charges, warranty expenses, finance charges are connected with the purchase of wind mill before it is ready to commence its operations. The civil foundation, erection & Commissioning, 40 Mtr Tower are part of wind mill, without which the wind mill would not function. Hence, in view of the decisions discussed above, we are of the view that there is merit in the claim of the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow depreciation at the higher rate of 80% on the rest of the items by considering the same as part of cost of wind mill.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 09/12/2016