INDUS VALLEY HOUSING,CHENNAI vs. DCIT, CHENNAI

Both the appeals of the assessee are directed against the respective orders of the Commissioner of Income Tax (Appeals)-7, Chennai, dated 30.11.2015 and pertain to assessment years 2009- 10 and 2011-12. Since common issue arises for consideration in both the appeals, we heard both the appeals together and disposing of the same by this common order.

Sh. T. Banusekar, the Ld. representative for the assessee, submitted that the assessee entered into an agreement for development of land with M/s Delux Apartments & Building Company. As per this agreement, the assessee is entitled to retain 45% of undivided share of the land and 55% of undivided share in the land would go to M/s Deluxe Apartments & Building Company.

The Ld. representative for the assessee further submitted that the subject land was situated at Nolambur in the suburban area of Chennai. In fact, the land was purchased by M/s Petro Plast Industries in February and March, 2005. The partnership of the assessee-firm was formed in April, 2005. Therefore, when the land was purchased, the firm itself was not in existence. Therefore, the intention of the individual partners, at the time of purchase of property, is only to treat the land as capital asset and not as trading asset. The partnership firm, which came into existence subsequent to purchase of land, has treated the land as capital asset in their books of account. After the formation of partnership firm, the document was registered in the name of the assessee-firm on 23.05.2005. Since the land was treated as capital asset, in order to generate funds to the assessee-firm, they intended to sell the land for a profit. Accordingly, in order to earn more profit on sale of land, a Memorandum of Understanding was entered for development of land with M/s Deluxe Apartments & Building Company. The sale consideration in the form of 88,200 sq.ft. of constructed area, which is equal to 45% of constructed area, was given to the assessee- firm. What was received by the assessee-firm was treated as capital asset. Therefore, the assessee returned the profit on sale of the property as capital gain. However, the Assessing Officer has treated the same as business income of the assessee.

Referring to the order of the CIT(Appeals), the Ld. representative for the assessee submitted that the land in question was purchased as investment and the same was shown under the head “fixed asset” in the books and not under “current asset”. The CIT(Appeals) ignored that the intention of the assessee is not to treat the assets as stock-in-trade. According to the Ld. representative, the assessee has not constructed any flat over the land. The assessee has simply handed over the land to M/s Deluxe Apartments & Building Company for construction and realized the profit in the form of 45% of constructed area. According to the Ld. representative, the original intention of the assessee was to keep the land as investment and not as trader. Referring to the order of the CIT(Appeals), the Ld. representative submitted that it is not correct to say that the dominant intention of the assessee was to commercially exploit the land for housing project. In fact, the payment for purchase of land was made in the month of February and March, 2005, before the partnership firm came into existence.

Referring to the order of the Administrative Commissioner in the case of one of the partners Mrs. Saroj Agarwal, who is the owner of adjacent land which was also developed by the very same builder along with the assessee’s land, the Ld. representative submitted that the Administrative Commissioner has directed the Assessing Officer to treat the gain on sale of the land as capital gain. In fact, Mrs. Saroj Agarwal claimed the profit as business income. However, the Administrative Commissioner directed the Assessing Officer to treat the same as capital gain and not as income from business. This order of the Administrative Commissioner attained finality. According to the Ld. representative, when the part of the land in the very same project was treated as capital asset, the balance land cannot be treated as stock-in-trade.

On the contrary, Sh. Pathlavath Peerya, the Ld. Departmental Representative, submitted that the assessee- partnership firm was formed by a partnership deed dated 05.04.2005 The payment for purchase of land at Nolambur was paid by M/s Petro Plast Industries Ltd. in the month of February-March, 2005. The property was registered in the name of assessee- partnership firm on 23.05.2005. The assessee entered into a Memorandum of Understanding with M/s Deluxe Apartments & Building Company on 12.04.2006 for development of land.

We have considered the rival submissions on either side and perused the relevant material available on record. The question arises consideration is whether the investment made by the assessee in the land at Nolambur is a stock-in-trade or capital asset? If the land is stock-in-trade, then naturally the profit on sale has to be considered as income from business. If it is considered as capital asset, then the profit has to be treated as capital gain. To ascertain whether the land in question is capital asset or stock-in- trade, the intention of the assessee at the time of purchase of the property has to be ascertained. It is not in dispute that the assessee-partnership firm was formed on 05.04.2005 by means of partnership deed. However, the payment for purchase of land at Nolambur was made by M/s Petro Plast Industries Ltd. in February- March, 2005. Therefore, it is obvious that before formation of partnership firm, the partners, namely, the members of the Agarwal family decided to purchase the property by making payment.

The next question arises for consideration is when the partnership firm itself was formed for purchase and sale of land, can the subject land be held as capital asset? This Tribunal is of the considered opinion that a company / partnership firm can have two portfolios, one is stock-in-trade and another is investment. Even a partnership firm, which is engaged in purchase and selling of land, can retain part of land as stock-in-trade and part of land as investment. When the intention of the assessee is to treat the land as investment, merely because the same was used for development by entering into a Memorandum of Understanding within a short span of time, that cannot be a reason to treat the subject land as stock-in-trade. The assessee in order to generate funds for business might have entered into Memorandum of Understanding with another trader who is dealing in real estate. If the intention of the assessee is to deal in real estate, the assessee would have developed the land by itself. In the case before us, the assessee has not dealt with the land by itself. The land was in fact handed over to other trader in real estate for development. The matter would be entirely different if the assessee constructed the multistory building and developed the land. Since the land was simply handed over to other trader for development, this Tribunal is of the considered opinion that the land in question has to be treated as capital asset.

We have carefully gone through the order of the Administrative Commissioner, a copy of which is available at page 3 of the paper-book. Mrs. Saroj Agarwal, one of the co-owners of the land in which the project was developed by M/s Deluxe Apartments & Building Company, treated the transaction as business transaction and claimed the profit as business income. The Administrative Commissioner by exercising his power under Section 263 of the Income-tax Act, 1961 (in short 'the Act') found that the assessee never engaged in the business and the land was sold without even improvement. No supplementary work was made by the assessee other than entering into Memorandum of Understanding for development with some builder to which the present has entered into. The Administrative Commissioner in the case of Mrs. Saroj Agarwal found that part of the land was capital asset. Accordingly, he directed the Assessing Officer to treat the gain as capital gain. This order of the Administrative Commissioner, passed under Section 263 of the Act attained finality. In this case also, even though the partnership firm was formed 05.04.2005 and the land was registered in the name of the firm on 23.05.2005, the assessee has not commenced any business activities; no other land appears to have been purchased; no supplementary work was carried on by the assessee-firm in the subject land; no organized effort was made other than simply entering into Memorandum of Understanding with the builder. As all risks and rights relating to construction of building were vested with the builder and the assessee has not taken any risk in the construction and development of flats, this Tribunal is of the considered opinion that the profit on sale of the land in the hands of the assessee-firm cannot be treated differently than as it was treated in the case of Mrs. Saroj Agarwal.

In view of the above, this Tribunal is of the considered opinion that the profit on sale of land has to be necessarily assessed as capital gain and not as business income. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to treat the profit on sale of land as capital gain.

In the result, both the appeals of the assessee stand allowed.