ADDL CIT 2(1) CITY 2, MUMBAI vs. THE ESTATE INVESTMET CO. P.LTD, MUMBAI

This appeal by the revenue is directed against the order of the CIT (Appeals)-4, Mumbai dt. 30/11/2012 for Asst. Year 2009-10. The assessee has also preferred Cross Objection (‘CO’) in respect of the aforesaid order of the CIT (Appeals).

2.1 The assessee is a company engaged in investment in derivatives, other securities and money lending and also derives income from sale of land and sale of rights in land situated in Bhayander, Mira Road and Ghodbunder in Thane District, Maharashtra. For Asst. year 2009-10, the assessee filed its return of income on 30/09/2009 declaring income of Rs. 2,80,70,760/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny.

2.2 From the record, it is seen that up to Asst. year 2008-09, the income of the assessee from trading in derivatives and other securities was assessed as business income and business expenses were accordingly allowed. However, in the year under consideration, the Assessing Officer (‘AO’) observing that there is a nominal business activity held that the expenses claimed were excessive and consequently disallowed the business expenses claimed by the assessee. In respect of the assessee’s activity of sale of ownership lands (‘Kabjadar land’), the AO held them to be business activity and allowed business expenses, making the assessment thereunder on a protective basis. Apart from this, the assessee is also right holder (Eksali lands) in various plots of land in Mira, Bhayandar and CO 65/MUM/2014 Assessment Year: 2009-10 Ghodbunder in Thane District, Maharashtra. The assessee has offered capital gains or loss on transfer of such lands. The assessee adopted the cost as on 01/04/1981 at market value as per Regd. Valuer’s report and the consideration received as full consideration for ‘Kabjadar lands’. For Eksali lands, the cost as on 01/04/1981 was taken at 1/3rd value of ownerships land on that date as determined by the Regd. Valuer and the consideration received by the assessee is taken as the total consideration for transfer thereof. On the contrary, the AO in respect of ‘Kabjadar Lands’ has adopted the sale consideration as determined by the District Valuation Officer (DVO) u/s 55A of the Act as per Market Value and the cost thereof as on 01/04/1981 as determined by the ‘DVO’. In respect of ‘Eksali lands’, the AO has taken the cost as on 01/04/1981 at 10% of the ownership lands in the ratio of the reckoner value of ownership lands and actual sale consideration of Eksali lands as declared by the assessee. The capital gains declared by the assessee on account of ‘Kabjadar’ lands have also been assessed by the AO as business income on a protective basis.

2.3 In addition to the above, the AO also disallowed brokerage of Rs. 4 lacs and professional charges of Rs. 25.28 lacs expended on account of land dealings, while computing the Capital gains. The AO has also made on adhoc addition of Rs. 1.70crores while computing LTCG on sale of ownership land u/s 50C of the Act, even though it was not registered and without making a reference to the DVO. The AO also assessed an amount of Rs. 1.95 crores as Capital gains in respect of an advance of Rs. 1,97,69,142/- received against sale consideration of Rs. 2,00,50,000/-. In the manner laid out in paras 2.1 to 2.3 of this order (supra), the AO concluded the assessment for Asst. year 2009-10 u/s 143(3) of the Act vide order dt. 30/12/2011, wherein the income of the assessee was determined at Rs. 10,54,79,550/- and the CO 65/MUM/2014 Assessment Year: 2009-10 assessment of business income on protective basis was determined at Rs. 6,28,08,800/-.

4. Revenue, being aggrieved by the order of the CIT(Appeals)- 4, Mumbai dt. 30/12/2011, has preferred this appeal raising the following grounds:-

1. The order of the CIT(A) is opposed to law and facts of the case.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the claim of expenditure under the head business income even when there is hardly any activity relating to derivatives and finance during the previous year.

3. (a) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in treating the sale consideration received on sale of ownership land as business income. The Ld. CIT(A) did not appreciate the fact that the land was owned by the assessee for a long period of time and it had shown in the Balance sheet as investments. (b) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in appreciating the fact that the provision of section 50C of the IT act is code by itself and CO 65/MUM/2014 Assessment Year: 2009-10

applicable on the sale of a capital asset in computing the long term capital gain.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in coming to a conclusion that the AO has allowed all the expenses claimed by the assessee as the computation has started from net profit, thereby overlooking the fact that there is a disallowance made by the AO of an identical amount in the computation forming part of the order.

5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that income from transfer of ownership lands is to be assessed as business income, thereby overlooking that the fact the assessee had shown it as income from capital gains and he assessing officer also had assessed it under the head capital gains.

was heard in the matter and supported the action of the AO in disallowing the said expenditure on the grounds that there is no sufficient business activity or income therefrom, to justify the voluminous expenses claimed under the head business income.

5.2 Per contra, the Ld. AR supported the order of the Ld. CIT(A) in allowing the expenditure claimed against business income during the year under consideration. It was submitted that the same business activity has been carried out by the assessee in the past and similar expenses had been incurred and were accepted by the Department. It is contended that there is no reason whatsoever for the AO to make the said disallowance based on conjectures and surmises. It was submitted by the Ld. AR that a mere reduction in the revenues would not warrant disallowance of business expenses claimed which are fixed in nature from year to year. It was argued that the Ld. CIT(A) after examining the issue in detail has observed that the assessed is in the business of derivative transactions, other securities and money lending for the last 2 decades, but though their revenues have reduced considerably recently, the assessee’s business activity is in existence in the year under consideration. The Ld. AR submits that it is in this context that the Ld. CIT(A) allowed the expenses necessary for both maintaining the corporate existence of the assessee and for the assessee’s trade in derivatives, other securities and money lending.

5.3.1 We have heard the rival contentions and perused and carefully considered the material on record. From the details on record, it emerges that the assessee has been in the business of derivate transactions, other securities and money landing for over two decades and that the income from such transactions have all along been declared and assessed as business income. As observed by CO 65/MUM/2014 Assessment Year: 2009-10 the authorities below, the income/revenue and volume of such transactions has reduced considerably in the year under consideration, whereas the expenditure claimed against meagre income was substantial and not justified. It is seen that the AO inspite of acknowledging that the assessee’s business activity in trading of securities, derivates and money lending still continues in this year also, though on a smaller scale, proceeded to summararily disallow the entire expenditure claimed in this regard on the ground that the same were not incurred for business purposes. This action of the AO, in our view, was not warranted, in the facts and circumstances of the case, as it was based solely on summaries and conjectures .

5.3.2 We find in the impugned order, that the Ld. CIT(A) had noted that the business activity of the assessee continues and therefore the relevant corresponding expenditure is allowable. While observing that the expenditure claimed by the assessee’s in its business of trading in derivates, other securities and money lending was substantial when compared to meagre income/revenue therefrom, the Ld. CIT(A) held that the expenditure necessary for maintaining the assessee’s corporate existence or expenditure relating to the assessee’s trade in derivates, securities and money lending are to be allowed. The finding of the Ld. CIT(A), in our considered view, is reasonable in the facts and circumstances of the case. Before us, except for raising this ground, Revenue has filed to controvert the finding of the Ld. CIT(A) on this issue. In this view of the matter, we uphold the finding of the Ld. CIT(A) that since the business activity of the assessee in trading of derivates, other securities, and money lending continues in the year under consideration, even though on a much reduced volume and scale, the expenditure claimed in respect of such business income is to be allowed to the extent that CO 65/MUM/2014 Assessment Year: 2009-10 they are necessary for maintaining the corporate existence of the assessee or those expenses which are related to such business. Consequently, ground No. 2 raised by the Revenue is dismissed.

6. Grounds No. 3 and 5 6.1 In these grounds, which are interconnected, Revenue contends that the Ld. CIT(A) erred in treating the sale consideration received on sale of ‘ownership land’ as business income, without appreciating the fact that the lands were owned by the assessee for a long period of time, and being shown as an investment in the balance sheet, as such it should have been assessed as capital gains. It was also contended that the provisions of Section 50C were applicable on sale of Capital assets for computation of LTCG. It was further contended that the Ld CIT(A) wrongly held that the AO had allowed the expenses claimed by the assessee at para 9 of the order of assessment. The Ld. DR supported the grounds raised and placed strong reliance on the order of the AO on these issues.

6.2 Per Contra, the Ld. AR for the assessee supported the findings in the order of the Ld. CIT(A).

6.3.1 We have heard the rival contentions and perused and carefully considered the material on record. It is seen from the order of assessment that the assessee had declared the income from sale of ‘Ownership Lands’ as capital gains/loss. The AO while completing the order of assessment, at para 9 thereof has also assessed the income from sale of ‘ownership lands’ as business income on a protective basis, while at the same time accepting the same as capital gains as declared by the assessee in the return of income. We find that on appeal, the Ld. CIT(A) observing that since the CO 65/MUM/2014 Assessment Year: 2009-10 actively of sale of ‘ownership lands’ plots was quite frequent, that the land was treated as stock-in-trade and the assessee had to execute conveyance deeds and maintain its rights and in this context requires legal consultation and other expenses to be incurred; concurred with the view of the AO that the income from sale of ‘ownership lands’ is business income . Except for raising the ground that income from sale of ‘ownership lands’ should be assessed as capital gains, since the assessee had declared the same as income from capital gains, no cogent reasons or evidence has been put forth by the Ld. DR to controvert the factual findings of the Ld. CIT(A) and also those of the AO that the income from sale of ‘ownership lands’ is to be assessed as business income. In the facts and circumstances of the case as discussed above, we concur with the findings and reasoning of the Ld. CIT(A) that, in view of the frequency of sale of ‘ownership lands’; the fact that the same was treated as stock-in-trade and the extent of expenses involved to execute conveyance deeds, maintain its rights and legal and other expenses incurred in this regard, we uphold the view of the ld. CIT(A) that the income from sale of ‘ownership lands’ is to be assessed as ‘business income’ . We hold and direct accordingly. Consequently, grounds at sr. no. 3(a) and 5 are dismissed.

6.3.2 In respect of revenue’s averment that the Ld. CIT(A) has erred is not appreciating that the provisions of Section 50C of the Act were applicable on sale of capital assets for computing LTCG, we find from a perusal of the impugned order that the Ld. CIT(A) has rendered no such finding. The Ld. CIT(A) has in fact held that the provisions of Section 50C of the Act are not applicable in the case of in case business income in view of the decision of inter alia, Indralok Hotels P. Ltd.(32 SOT 419)(Mum). We therefore reject ground no.3 (b) raised by revenue.

CO 65/MUM/2014 Assessment Year: 2009-10 6.3.3. In respect of revenues claim in grounds no.4, that the Ld. CIT(A) erred in concluding that the AO has allowed all the expenses claimed by the assessee, after an appreciation of the details on record, we concur with the observation of the Ld. CIT(A) that the AO at para 9 of the Order of assessment, while assessing the transfer of ‘ownership lands’ as business income, has allowed all expenses claimed by the assessee in regard to transfer of lands. We also find that the AO has observed that the various components of income and expenses in respect of transfer of ownership lands left him with no other option than to conclude that land dealings constitute that main business of the assessee and that the nature of expenses are such that it is apparent that the assessee has been employing various resources for maintaining its rights in land, for disposing the assets through lawyers, brokers, employees, directors etc. In this factual matrix as laid out above, we concur with the order of the Ld. CIT(A) in holding that all expenses, other than that part of the legal expenses, relating to ‘Eksali lands’ and those for maintaining the corporate existence of assessee and for the assessee’s trading in derivatives, other securities and money lending, are to be allowed against business income from sale of ‘ownership lands’. We consequently dismiss ground No: 4 raised by the assessee.

thereof. In these circumstances, since revenue’s appeal for Asst. year 2009-10 stands dismissed, the CO is rendered infractuous and is accordingly dismissed.

Order pronounced in the open court on 20th January, 2016