GIRDHARILAL K . AGARAWAL,MUMBAI vs. DCIT 12(3), MUMBAI

With this appeal the assessee has challenged the correctness of the order of the Ld. CIT(A)-23, Mumbai dated 09.03.2012 pertaining to A.Y. 2008-09. The first grievance of the assessee relates to the treatment of capital gains as business income.

The return for the year under consideration was selected under CASS and accordingly statutory notices were issued and served upon the assessee.

While scrutinising the return of income the AO noticed that the assessee has offered income under the head ‘Capital Gains’. The assessee was asked to furnish reasons as to why the income from short term capital gains should not be treated as ‘Income from Business’. Vide a letter dated 11.12.10, the assessee strongly contended that he has been showing investment in shares and in units of mutual funds for the last so many years and has been consistently offering gains under the head ‘Short Term Capital Gains’. The claim of the 2 Shri Girdharilal K. Agrawal assessee did not find any favour with the AO who was of the strong belief that principles of res adjudicata do not apply on tax proceedings. Further, the AO was of the opinion that the assessee is actually engaged in the business of share trading since he is also doing business in future and options segment of the share market. The AO further observed that the holding period of the assessee ranges from a short period of one day to 200 days, therefore, the contention of the assessee that he is an investor cannot be accepted. The AO accordingly treated the capital gains offered as STCG/LTCG as ‘Business Income’ of the assessee.

Assessee carried the matter before the Ld. CIT(A) and reiterated his claim. However, the Ld. CIT(A) did not concur with these submissions of the assessee and drawing support from various judicial decisions the Ld. CIT(A) confirmed the assessment. Aggrieved by this, the assessee before us.

The Ld. Counsel for the assessee drew our attention to the assessment orders made under section 143(3) of the Act for Assessment Years 2004-05, 2006-07 & 2007-08. The Ld. Counsel pointed out that in all these years the officer has accepted the share transactions under the head ‘Capital Gains’. Therefore, on identical set of facts the AO should not take any different view as taken in earlier years. The Ld. Counsel further pointed out that the Ld. CIT(A) has erred in stating that the assessee has used borrowed funds. Drawing our attention to the balance sheet, the Ld. Counsel pointed out that the assessee was having sufficient own funds for making investments in the shares. It is the say of the Ld. Counsel that considering the past history of the assessee the claim of STCG/LTCG should be accepted.

We have carefully considered the orders of the authorities below. We have also gone through the relevant documentary evidences brought on record before us. There is no dispute that in the Assessment Years 2004-05, 2006-07 & 2007-08 the STCG/LTCG have been assessed as such while making the 3 Shri Girdharilal K. Agrawal order under section 143(3) of the Act. We also find that the facts and issues before us are identical to the facts considered in earlier assessment years. Therefore, in our considered opinion on identical set of facts when the law has not changed the Revenue Authorities should not take a different view. This is against the rule of consistency as laid down by the Hon’ble Supreme Court in the case of “Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax” [1992] 193 ITR 321 (SC).

Considering the facts in totality in the light of the ratio laid down by the Hon’ble Supreme Court (supra), we direct the AO to treat the gains under the head ‘STCG/LTCG’. Ground No.1 is accordingly allowed.

Ground No.2 relates to the direction of the Ld. CIT(A) to treat all gains from PMS as income from business. This issue finds place at page 7 of the Ld. CIT(A)’s order wherein the Ld. CIT(A) has heavily relied upon the decision of the Tribunal-Delhi Bench in the case of “Radials International” in ITA No.1368/Del/2010. The Ld. CIT(A) has also incorporated the relevant findings of the Tribunal in the body of the assessment order and at page 9 the Ld. CIT(A) observed that “In view of the above said decision it is clear that the PMS manager enters into transactions on behalf of its client, and buys and sells shares on behalf of the client”. The Ld. CIT(A) at page 10 further observed that respectfully following the case of Delhi ITAT, the AO is also directed to treat all gains from PMS as ‘Income from Business’.

At the very outset, we have to state that since the Ld. CIT(A) has heavily relied upon the decision of the Tribunal in the case of “Radials International” (supra) we have to see from the outcome of the decision of the Tribunal. We find that the said decision of the Tribunal has been reversed by the Hon’ble High Court of Delhi in dated 25.04.14. The concluding part of the Hon’ble High Court reads as under:

As mentioned elsewhere since the finding of the Ld. CIT(A) is based on the decision of the Tribunal and since the decision of the Tribunal has been reversed by the Hon’ble High Court, respectfully following the decision of the Hon’ble High Court of Delhi (supra), we direct the AO to treat the gains under the head ‘STCG/LTCG’. Ground No.2 is accordingly allowed.

Ground No.3 relates to the additions made by the AO by treating exempt profit on sale of agricultural land as taxable income.

During the course of the scrutiny of assessment proceedings and after perusing the details filed by the assessee, the AO found that the assessee has sold 2 plots of land during the year. These plots are situated at Ramshej Village, Dindori Taluka, District Nashik. The AO further found that the assessee has claimed profit on sale of these lands as exempt. However, the AO found that the assessee has not claimed the said exemption in the return of income filed by him in ITR-3. The assessee was asked to justify his claim and to further explain why the capital gain on sale of land should not be taxed. The AO also deputed Income Tax Inspector to verify land records. The AO also called for the report from the Tahasildar. The AO found that the Tahasildar’s report states that the land is 5 kms from the municipal corporation. The assessee was made available this report of the Tahasildar and was asked to explain as to why the gains should not be taxed. On receiving no plausible reply, the AO treated the gains as the STCG. Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) but without any success.

Before us, the Ld. Counsel for the assessee drew our attention to the provisions of section 2(14)(iii)(a). It is the say of the Ld. Counsel that the Revenue Authorities have misinterpreted the provisions of section 2(14)(iii)(a). The Ld. Counsel vehemently stated that the land is an agricultural land and is 5 Shri Girdharilal K. Agrawal within the exemption clause of the definition of capital asset. Per contra, The Ld. D.R. has strongly supported the findings of the lower authorities.

We have carefully considered the orders of the authorities below. We have also gone through the provisions of section 2(14)(iii)(a) of the Act as it stood during the assessment year under consideration and which reads as under: “14(iii) agricultural land in India, not being land situate— (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand 11[***]”

We have also gone through the contents of the letter/report of the Tahasildar, Dindori dated 20.12.10 wherein he has stated that population of village Ramshej where the impugned land is situated is 2929 as per the census. The report also says that the said land was sold as agricultural land and till date it has not been converted for non agricultural dues. In our considered opinion, for claiming the exemption as agricultural land either of the two conditions has to be fulfilled. a) It should not be in any area within such distance not being more than 8 kms from the local limits and any municipality or cantonment board and; b) which has a population of not less than 10,000.

Since the population of village Ramshej where the impugned land is situated is only 2929 as per the report of the Tahasildar, in our understanding of law the said land has to be treated as agricultural land outside the purview of the definition of capital asset. We accordingly set aside the finding of the Ld. CIT(A) and direct the AO to delete the addition of Rs.1,15,28,650/-. Ground No.3 is accordingly allowed.

Accordingly appeal filed by the assessee is partly allowed.