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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – III, Chennai, dated 23.01.2013 and pertains to assessment year 2001-02.
The only issue arises for consideration is with regard to disallowance of project expenses claimed by the assessee.
Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the assessee is engaged in the business of dealing in shares and property development. In fact, the assessee was constructing building complexes and letting them on rent. The assessee is declaring rental income for the purpose of taxation.
The assessee was developing a property at Greams Road, Chennai. According to the Ld. D.R., there was litigation which was almost extended upto fifteen years. In the process, the assessee incurred heavy legal and professional charges. Ultimately, the assessee succeeded. In fact, the assessee acquired 10 grounds and 304 sq.ft. of land from the legal heir of Shri Abdul Khader.
According to the Ld. D.R., the assessee was considering various options including construction of a commercial building and letting it to tenants or disposing of the vacant land. Finally, the project was abandoned and the assessee had written off the entire expenditure as business loss.
The Ld. Departmental Representative further submitted that the assessee followed the project completion method. Since the project at Greams Road was not at all commenced and after litigation, the assessee was able to acquire only the land, the expenditure incurred by the assessee has to be considered as capital in nature. The expenditure incurred by the assessee before starting the construction is only on the capital field and abandonment of the project cannot be a reason for claiming the loss. According to the Ld. D.R., had the project not been abandoned as claimed by the assessee, the assessee would have developed the property and let out the same to various tenants and derived rental income. The property in that case is only a capital asset. Therefore, according to the Ld. D.R., the assessee incurred the expenditure for the purpose of establishing a capital asset.
Hence the loss suffered by the assessee cannot be allowed as revenue loss. The Ld. D.R. placed his reliance on the judgement of Apex Court in Hasimara Industries Limited v. CIT (230 ITR 927).
On the contrary, Shri S. Sridhar, the Ld.counsel for the assessee, submitted that admittedly, the assessee is engaged in the business of dealing in shares and development of property. In the course of business activity, the assessee attempted to acquire a property at Greams Road, Chennai. In fact, according to the Ld. counsel, the assessee entered into a joint development agreement.
Due to various formalities in starting the construction, there was a delay in the project. According to the Ld. counsel, in fact, the properties were reconstituted as a single unit in the year 1990 and an application was submitted to Chennai Metropolitan Development Authority for construction of three-storied building. In fact, the application was rejected by Chennai Metropolitan Development Authority on the ground that the property will be affected by High Capacity Mass Transit System proposed by Government of Tamil Nadu. According to the Ld. counsel, in view of the delay in starting the project, one of the co-owners of the property cancelled the agreement on 20.10.1998.
The Ld.counsel for the assessee further submitted that one of the co-owners Shri G.M. Khaleelullah also filed a civil suit. When the suit was pending, Shri Khaleelullah went to compromise the matter. Subsequently, according to the Ld. counsel, an agreement was entered into on 08.12.1993 wherein Shri Khaleelullah was paid an additional sum along with additional built up area. Based on the assurance of Shri G.M. Khaleelullah, the Government of Tamil Nadu by a Government Order dated 03.04.1996, granted permission for construction of multi-storied building in the property. According to the Ld. counsel, even though there was an agreement to withdraw the suit, in fact, Shri Khaleelullah did not withdraw the suit which was pending before the High Court. Again, Shri Khaleelullah raised dispute stating that he was not willing to gift his land as it would affect his interest in the property. He claimed for the compensation.
Because of various disputes, according to the Ld. counsel, the assessee could not succeed in the project. Ultimately, the assessee was able to acquire 10 grounds and 304 sq.ft. from Shri G.M. Abdul Khader.
The Ld.counsel for the assessee further submitted that since the assessee was in the business of developing properties, after considering the various aspects, the assessee thought that developing the land, which was acquired from Shri Abdul Khader, may not yield any profit, accordingly, decided to sell the land. In that process, the assessee has suffered loss. According to the Ld. counsel, the assessee claimed the loss as revenue loss while computing the taxable income. However, the Assessing Officer disallowed the claim of the assessee on the ground that it is a capital loss. According to the Ld. counsel, when the assessee is in the business of developing property and letting out the same on rent, the loss suffered by the assessee in the process of developing the land has to be allowed as revenue loss. Referring to the judgement of Madras High Court in the assessee's own case for assessment year 2004-05, reported in 320 ITR 345, the Ld. counsel submitted that when the assessee was in the business of property development, the property has to be treated as business asset and not as capital asset. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly allowed the claim of the assessee.
We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee is engaged in the business of dealing in shares and property development. From the orders of the lower authorities it appears that the assessee claimed a sum of `81,95,892/- under the head “Building Project Expenses”. The assessee has also claimed another sum of `30,87,438/- towards interest for Greams Road project. The assessee entered into a joint development agreement with four individuals for development of property at Greams Road.
The assessee could not get the approval from Chennai Metropolitan Development Authority for various reasons. Ultimately, the Government of Tamil Nadu by an order dated 03.04.1996, permitted the assessee for construction of multi-storied building. It appears there was dispute among the land owners and the assessee had to pay additional compensation apart from constructed area. After lapse of almost 15 years, the assessee was able to acquire 10 grounds and 304 sq.ft. through one of the co-owners, namely, Shri G.M. Abdul Khader. The assessee, for the reason best known to it, decided to sell the property instead of developing the same. In that process, the assessee suffered a loss. The assessee claimed the loss as revenue loss while computing the taxable income.
However, the Assessing Officer found that it is not a revenue loss, it is only capital loss. Therefore, it cannot be allowed while computing the total income.
The CIT(Appeals), however, by placing reliance on the judgement of Madras High Court in CIT v. Tiruvengadam Investments Private Limited (2010) 320 ITR 345, found that the loss suffered by the assessee in the project has to be allowed as revenue loss, and accordingly, allowed the claim of the assessee.
The assessee apparently is developing the property and letting out the same and receiving rental income. However, in this case the assessee has entered into a joint development agreement for the purpose of developing the property. Therefore, it has to be ascertained whether the land and building is treated as capital asset by the assessee for receiving rental income or it is a stock-in-trade for selling the land and building. A copy of the development agreement said to be entered into between the parties is not available on record. If the assessee constructed only the building and let out the same to various persons for rent, then the land and building has to be treated as capital asset because the assessee is not treating the land and building as stock-in-trade. The assessee is exploiting the land and building by letting out only the building to the tenants. If the assessee has entered into a joint development agreement as claimed for the year under consideration and selling the land and building after developing of the project, then naturally, the land and building has to be treated as stock-in-trade in the hands of the assessee. For the purpose of determining the land at Greams Road either as stock-in-trade or capital asset, the development agreement and other related documents need to be examined.
In the absence of any material available on record, this Tribunal is of the considered opinion that this matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh in the light of the development agreement and the nature of business of the assessee and thereafter, decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.
In the result, the appeal filed by the Revenue is allowed for statistical purposes.