VIPIN P MEHTA,MUMBAI vs. ITO WD 24(3)(4), MUMBAI

The facts of the case, briefly, are as under: - 2.1 The assessee (Proprietor V.P. Mehta & Co.), stated to be engaged in the business of manufacturing and printing of packaging material and construction, filed return of income for A.Y. 2010-11 on 13.10.2010 declaring total income of `17,93,831/- from business, capital gains and from other sources. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Act vide order dated 19.03.2013, wherein the income of the assessee was determined at `1,04,18,910/- in view of the following additions/disallowances: - `84,75,112/- (i) Short Term Capital Gains (STCG) ` 38,334/- (ii) Disallowance of 10% of Wages ` 1,05,628/- (iii) Disallowance of Excess Interest paid (iv) Addition hoc disallowance of Expenses ` 20,000/- Shri Vipin P. Mehta 2.2 Aggrieved by the order of assessment dated 13.10.2010 for A.Y. 2010-11, the assessee went in appeal before the CIT(A)-34, Mumbai. The learned CIT(A) dismissed the assessee’s appeal vide the impugned order dated 30.09.2014. 3. Aggrieved by the order of the CIT(A)-34, Mumbai dated 30.09.2014 for A.Y. 2010-11, the assessee has preferred this appeal before the Tribunal raising the following grounds: - “

The learned Assessing Officer has erred in law and on facts in not reducing the profit from sale of gala amounting to Rs.22,00,716/- as computed by the appellant in the original return of income while treating the profit from sale of gala as capital gains."

Ground No. 1 – Profit on sale of property – Business income or Capital Gain 4.1 In this ground, the assessee assails the impugned order of the learned CIT(A) in upholding the order of the Assessing Officer (AO) in respect of profit on sale of gala as capital gains instead of Business Income derived from development rights granted as claimed by the assessee. The learned A.R. of the assessee reiterated the submissions put forth before the authorities below on this issue. According to the learned A.R., the assessee is regularly carrying on the business of manufacturing activity of packaging material at its factory premises at Bhayander. Vide agreement dated 01.11.2007 titled ‘Agreement for Development’ the assessee took over the entire land of a dilapidated building alongwith development rights for `11 lakhs. After incurring expenditure of `57,99,284/- as cost of improvement, etc. the resultant industrial gala was sold vide agreement dated 30.12.2009 to Shri Bharat R. Thakkar and Shri Tanna Thakkar for a consideration of `80 lakhs. It is contended that the assessee had not purchased the said property but only the development rights and therefore had no intention to purchase capital assets and therefore in these circumstances it is clear that the intention of the assessee was of construction of gala and sale thereof. Therefore, the assessee’s claim that the profit on sale of the gala is to be treated as Business Income may be allowed. 4.2 Per contra, the learned D.R. for Revenue placed reliance on the orders of the authorities below. According to the learned D.R., it is evident from perusal of the agreement dated 01.11.2007, that the assessee has acquired the said property alongwith the rights of development of the dilapidated building which was improved/converted to a gala. This envisages that the assessee steps into the shoes of the owner of the property, whatever may be the nomenclature given to the agreement. In this regard, the learned D.R. drew the attention of the Bench to the Sale Shri Vipin P. Mehta Deed dated 30.12.2009 of the same property (copy placed at pg. 2 to 20 of the paper book) wherein at page 11 this agreement has been signed, sealed and delivered by “OWNER” Shri V.P. Mehta; the assessee in the case on hand to the “PURCAHSER”, Bharat R. Thakkar and Tanna B. Thakkar. This clearly proves that the assessee became ispo facto owner of this property vide agreement dated 01.11.2007 no matter the nomenclature of developer/development, etc. given in this agreement. It is further contended that if the transactions in respect of the property showed the assessee’s intention that the same were part of business activity resulting in business income, it should have appeared as stock-in-trade in the assessee’s Profit & Loss account and Balance Sheet for the period from year ending 31.03l.2008 to 31.03.2010. But this is not the case at all. It is prayed that the above facts clearly bring out that the authorities below were correct in holding that the profit on sale of the aforesaid gala was to be taxed as STCG and not business income as claimed by the assessee. 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record. From a appreciation of the facts on record it is seen that during the year under consideration the assessee has sold a gala and declared the profit of `22,00,716/- thereof as business income. On an examination of the purchase agreement dated 01.11.2007 the AO observed that the assessee had purchased the land alongwith development rights and whatever the nomenclature of the agreement, it was an outright purchase, whereby the assessee stepped into the shoes of the owner. After incurring expenditure on improvement, the assessee sold the property on 30.12.2009 for `80 lakhs. On appeal, this view was upheld by the learned CIT(A). 4.3.2 On a consideration of the facts of the matter as brought out by both parties, it appears to us that though the nomenclature of the agreement dated 01.11.2007 is given as development agreement, a perusal of the various recitals in the agreement indicate that apart from acquiring all development rights, the assessee is the de facto owner of the property as he has the absolute rights of possession, developing, selling, receiving sale proceeds, etc. to the total exclusion of the erstwhile owner. This view of Shri Vipin P. Mehta ours is further confirmed as perusal of the sale agreement of the said property, i.e. gala dated 30.12.2009 (copy placed at pg. 2 to 20 of the paper book) would show that on the last page, page 11 (pg. 14 of the paper book), the assessee has signed, sealed and delivered the property in his actual capacity as “OWNER” of the property. If the ownership still vested in the erstwhile owners, as claimed by the assessee, then they should have been at least consenting parties to the sale deed dated 30.12.2009. These documentary evidences, in our view, puts paid to the assessee’s claim on facts that the income/profit arising on sale of the gala was his business income. In our view, the income from sale of gala has been correctly held by the authorities below to be exigible to tax as STCG and not business income. With due respect, the judicial pronouncements cited by the assessee do not come to his rescue as they are factually different and distinguishable from the factual situation in the case on hand. In this factual and legal matrix of the case, we find no merit in this ground No. 1 raised by the assessee and consequently dismiss the same.

Ground No. 2 – Applicability of the provisions of section 50C of the Act 5.1 In view of our decision (supra), holding that the assessee’s profit on sale of the gala vide agreement dated 30.12.2009 is to be assessed as STCG and not business income (supra), the provisions of section 50C are to be invoked and have been rightly invoked in this case by the authorities below. Since the sale consideration stated in the sale agreement dated 30.12.2009 for sale of gala at `80 lakhs, was lower than the valuation shown for stamp duty papers by the Stamp Validation authorities at `1,02,20,000/-, the provisions of section 50C have been correctly invoked for taking the sale value of land at Rs.1,02,20,000/- while computing the STCG. Consequently, ground No. 2 of the assessee’s appeal is dismissed.

Ground Nos 3 & 4 – Cost of Improvement 6.1 The claim of the assessee is that the expenditure incurred on cost of construction/improvement was totally `57,99,284/- including under other heads. On examination thereof, the AO called for information under Shri Vipin P. Mehta section 133(6) of the Act in order to verify the expenditure from following four parties: - (i) Adinath Steel Corporation `4,58,640/- ` 2,72,456/- (ii) Shrinath Corporation ` 1,22,950/- (iii) Asif Patel ` 10,350/- (iv) Shree Ram Trading `22,00,000/- (v) N.J. Lala Total `30,64,396/- Since the notice sent to these parties returned unserved, the AO required the assessee to produce these parties before him for verification. As the assessee neither produced the parties before the AO for verification, nor filed account/balances confirmations from them, the AO held these expenses to be not genuine and reduced the cost of improvement and construction to that extent. On appeal, the learned CIT(A) upheld the AO’s view in the matter. 6.2 We have heard the rival contentions and perused and carefully considered the material on record. According to the learned A.R. of the assessee, even though the aforesaid four parties did not respond to notices under section 133(6) of the Act or file confirmation before the AO, the assessee filed the details of additions/cost of improvement expenses alongwith supporting bills in respect of the gala before the AO and therefore the claim ought to be allowed. From an appreciation of the facts of the matter on record, it is seen that the learned CIT(A) has in fact taken due note of the assessee’s submissions in this regard at pages 11 to 13 of the impugned order and taken note thereof while dismissing the assessee’s claim of expenditure incurred on cost of improvement in respect of the aforesaid four parties (supra) amounting to `30,64,396/-. Except for raising these general arguments before us, the assessee had not placed on record any material evidence which controverts any of the findings of the authorities below on this issue. In this factual matrix of the case, we uphold the action of the authorities below in disallowing the assessee’s claim for having incurred expenditure of `30,64,396/- as cost of improvement in respect of the aforesaid four parties. Consequently grounds 3 and 4 of the assessee’s appeal are dismissed.

Ground No. 6 – Disallowance of interest expenditure 8.1 In this ground, the assessee challenges the action of the learned CIT(A) in confirming the disallowance of `1,05,628/- being interest paid in excess of 12% for loans taken for his business without considering the fact that the same was the prevailing market rate of interest during that period. After hearing both parties and carefully perusing the orders of the authorities below, we find that both the AO and CIT(A) has summarily brushed aside the assessee’s arguments as unsatisfactory without assigning any cogent reason for the said disallowance. In this factual view of the matter we, in the interest of justice, set aside the orders of the authorities below on this issue and restore the matter to the file of the learned CIT(A) for fresh consideration and adjudication after affording the assessee adequate opportunity of being heard and to file details/ submissions required and the AO opportunity to rebut the same. Consequently, ground No. 6 of assessee’s appeal is treated as allowed for statistical purposes.