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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI R.C. SHARMA & SHRI SANDEEP GOSAIN
ORDER
Per R.C. Sharma, Accountant Member
1. This appeal filed by the Revenue is against the order of CIT(A) for assessment year 2004-05, in the matter of order passed u/s 143(3) of the Income Tax Act. ./2014 2 (Assessment Year : 2009-10) 2. The only grievance of the Revenue relate to CIT(A)’s action for allowing assessee’s claim of Long Term Capital Gain on sale of land. 3. Rival contentions have been heard and record perused. Facts in brief are that assessee is a partnership firm engaged in the business of Building Construction and Land Developers and had filed its return of income for A Y.2009-10 on 30.09.2009 declaring total income of Rs. 62,85,48,030/-. During the course of assessment proceedings, it was seen by the Ld. AO. from the details filed that the assessee had shown LTCG on sale of plot amounting to Rs. 62,34,88,496/-. The assessee had entered into an agreement for sale cum development dated 29.07.1986 to purchase the land admeasuring 260680 sq. meters at Revenue Village Achole, Taluka Vasai for Rs. 1,42,00,000/-. It was seen from the agreement for sale that at the time of agreement, only 10% of the purchase price i.e. Rs 14,20,000/- was paid and the remaining amount was to be paid in four equal half yearly installments. Thereafter, the deed of conveyance dated 20.10.1989 was executed in respect of the said entire property in favour of the assessee. The assessee got the building plans approved for Sector-1 on a portion of the said property admeasuring about 21,043 sq. mtrs. and commenced construction of 12 buildings on Sector - 1.
The remaining larger portion of the said property admeasuring about 2,10,686 sq.mts. was sold by the appellant vide Conveyance Deed dated 22.04.2008 for total consideration of Rs. 69,00,00,000/- and after deducting expenses related to transfer and the indexed cost of acquisition, the assessee had offered LTCG on sale of plot amounting to Rs. 62,34,88,496/- during the year under consideration. Page 2 of 12 ./2014 3 (Assessment Year : 2009-10) The Ld. AO. found that the sole purpose of constitution of the assessee firm was to purchase the said Entire Property and then use it for business purpose. The Ld. AO. asked the assessee to explain why the profit on sale of land may not be treated as business income of the assessee. Ld. AO after considering the submissions of the assessee, treated the said property sold by the assessee as Sale of the stock-in-trade of the assessee and the income resulting thereon as Business Income of the assessee.
4. By the impugned order, the CIT(A) held that the land was held by the assessed as investment, therefore, assessee is entitled for indexation as well as benefit of Long Term Capital Gain thereon, after having the following observations:- “2.4.1 I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 2.4.2 Ground No.1 is general in nature and is subsumed in Ground No.2 dealing with the treatment of LTCG as Business Income and denial of benefit of indexation etc. and hence, it need not be adjudicated separately. 2.4.3 Ground No.2 deals with the action of the Ld. A.O. in assessing the LTCG of Rs. 62,34,88,496/- on sale of plot of land as Business Income and not assessing the same at Rs. 66,53,72,212/-. The said ground is also against denying the benefit of indexation of cost of the said plot of land, disallowance of Rs. 8,45,506/- incurred on the sale of the said plot of land and ultimately denying the benefit of concessional rate of taxation u/s.112 of the I.T. Act. 2.4.4 Ld. A.O while dealing with the same has made a detailed discussion and mainly based his decisions on the following grounds:- i) No documents were submitted in support of the claim that while purchasing the land in question in the year 1986 although the appellant wanted to develop one part of the said land, owing to the desire of the ./2014 4 (Assessment Year : 2009-10) vendor to sell the land to the appellant in one piece, the whole land had to be purchased. (ii). Appellant's contention that it did not have requisite skills and the expertise to develop the township was a mere bald statement. iii) Appellant's contention that large part of the land was under CRZ and was not available for development was not trusted by the Ld. AO. iv) Appellant's contention that this land was always shown separately from the piece which was developed by it earlier and was separately shown as investment in the Balance Sheet from the year 2000 onwards also did not find favour . v) Buying and selling of freehold land or leasehold land was the main business of the appellant. 2.4.5 Per contra, Ld. AR for the appellant during the course of the appellate proceedings has filed detailed and comprehensive submissions and I must commend the quality of arguments made by Shri Pradip Kapasi, Ld. AR. 2.4.6 At the outset, it has been mentioned by the Ld. AR that all the details relevant to the computation of income were furnished by them before the Ld. AO. from time to time. Briefly, it may be important to go over the facts of the case once more to understand the issue under dispute. The appellant firm had entered into an agreement on 29.7.86 to purchase land at Taluka, Vasai for a consideration of Rs. 1,42,00,000/- and the conveyance of the land was done in the appellant's favour vide conveyance deed dated 20.10.1989. The appellant had debited the cost of purchase of the plots to the land account and not to the stock in trade account and had appropriated only that part of the land to the W.I.P account which was intended to be developed (sector A). It has been mentioned that a good part of the said land was under Coastal Regulatory Zone (CRZ) and was not available for development and even if development was possible, it would have required huge cost for development of infrastructure like roads, drainage, electricity, storm water canals and drinking water which had to be brought from a distance of more than 50 kms. Further, vide Collector's order dated 08.03.1989, development of a large part of a land admeasuring about 1,20,453 sq. mts. was prohibited and was reserved for road, gardens, playgrounds etc. Later, CIDCO took over the development of the area from MMRDA and issued a notice dated 23.11.1991 calling for complete stoppage of work of development. These facts along with further division of the land in two parts led the appellant firm to take a view that the undeveloped part of the land should be held as an investment. Even for sector A which was separately being developed by the appellant, CIDCO demanded a Page 4 of 12 ./2014 5 (Assessment Year : 2009-10) development charge of Rs. 30.13 lakhs which though appealed against was rejected by the Government of Maharashtra in the year 1993 further restricting the sale of the project. Later, draft development plan of CIDCO of 1998 provided for reservation of a large part of the appellant's land for construction of railway station. In view of these difficulties, the appellant firm passed accounting entries on 1.4.2000 to show in its books of accounts that the firm held the said part of land (sector B to G) as investment and ever since the said asset was being shown as investment. According to the Ld. AR, the fact that the assets had been held as investment was also examined in the past assessments of the firm particularly AY.2006-07 and 2008-09 where orders u/s.143(3) were passed. It has also been mentioned that during the course of assessment proceedings for AY.2008-09, an Inspector was entrusted to verify the correctness of the status of the land and whether any construction was carried out on the said plot. Ultimately, the investment land was sold by the appellant vide conveyance deed dated 24.2.2008 for a total consideration of Rs. 69 crores and as it was held for more than 20 years, the appellant offered the same as LTCG after deducting indexed cost of the asset (being Rs. 5,40,36,738/-) and expenses related to transfer aggregating to Rs. 1,24,74,766/-. However, Ld. AO. was not satisfied with the claim made by the appellant and held that he gain arising was to be computed under the head 'Business Income' and consequently, benefit of indexation had to be disallowed. Certain other claims for expenses of Rs. 8.45 lakhs were also disallowed. 2.4.7 Ld. AR has made a point wise rebuttal of the observations of the Ld. AO and as regards the presumption that land was acquired for development, it has been stated that right from the year of purchase, the entire land was shown under the head 'Fixed Assets' till 31.3.2000 and it was never shown as stock in trade or WIP except a part of the land which was put for development (sector A). It has also been stated that the appellant was within its rights to determine the status of assets i.e. to determine whether it holds an asset as an investment or as stock in trade and retained the right to change the nature of assets depending upon its intention. It has also averred that the right of the appellant to treat an asset and hold it as an investment is undisputed and is approved by various courts including in the following cases:- i) Sir Kikabhai Premchand, 24 ITR 506 (SC) - In the said case, The assessee, a dealer in bullion and shares had withdrawn a part of the bullion and shares out of the stock in trade for being held as capital asset. It was held that the assessee was entitled to convert an asset which was originally held as stock-in-trade into an investment. ./2014 6 (Assessment Year : 2009-10) ii) Bai Shirinbai K. Kooka, 46 ITR 86 (SC) - In this case of a converse situation, the asessee who was holding the shares as an investment asset had converted the investment in shares into stock in trade on becoming a dealer in shares. It was held that the shares held as investment which later on could be converted into stock-in-trade and sold, resulting into business income. 2.4.8 To reiterate Ld. AR further stated that to remove any doubts about the intention of the appellant firm to hold a part of the land as investment, it passed accounting entries on 1.4.2000 to recognize the said land as an investment asset. This decision was taken in view of the fact that the said part of the land fell in CRZ and was no more in development zone together with the fact that permission for NA had lapsed way back in 1991 and MMRDA and CIDCO had made it impossible to carry out any development activities even in sector 'A' which was meant for business purpose. It was also pointed out that treatment of land as an investment was accepted by the Ld. AO in the past by way of speaking assessment orders u/s. 143(3) clearly confirming the intention of the appellant firm to hold the part of the land as investment asset. Regarding the accounting entries and their relevance, following have been brought to my attention:- i) The Supreme Court vide order dated 15.11.2010 dismissed the Department's Special Leave Petition against the judgment of the Bombay High Court in CIT vs. Gopal Purohit 228 CTR 582 (Bom) where it was held that entries in books of account have a bearing in determining the nature of income though not conclusive. ii) Ess Jay Enterprises (P) Ltd., 165 Taxman 465 (Delhi HC) - It was held by the Hon'ble Delhi High Court that the treatment given by the assessee in the books of accounts is of importance while determining whether the asset is a capital asset or stock in trade. iii) Shubhkaran Rameshwarlal Agarwal vs Durgaprasad Private Ltd. AIR 1972 Guj 208, (HC), it was held that the Courts have considered that the entries from Books of Accounts are corroborative piece of evidence. Entries in the books of accounts may be relevant whenever they refer to a matter into which the Court has to inquire. 2.4.9 As regards the Ld. A.O's observations that the appellant had started development of some part of the land in 1990, it has been stated that without prejudice to the fact that the appellant had never treated the disputed part of the land in sectors B to G as stock in trade and had never shown the same in the books as such, but has shown the same has fixed Assets, Ld. AO. misdirected himself in not considering the fact that the said Page 6 of 12 ./2014 7 (Assessment Year : 2009-10) part of the land was not developable for several reasons. It was thus, contended that Ld. AO's observations that the appellant had acquired the said land for development and held it as such was totally unwarranted especially in view. of the fact that the appellant had clarified its intention to hold the said part of land as an investment w.e.f. 1.4.2000. 2.4.10 The contentions raised by the appellant have been considered and it is found that w.e.f. 1.4.2000, the appellant had consistently shown the impugned land as an investment, a fact which has not been negated by the Ld. AO and merely because on some part of the total land' (sector A), some development had been undertaken, the fact of consistency in the maintenance of books of accounts cannot be brushed aside without bringing anything further on record to suggest that in the entry made by the appellant, it had some intention to develop the said piece of land. Not having done so, Ld. AO cannot turn the clock back and go into the intention to the point of buying of land in the year 1986 because as per section 45(2) of the IT. Act, an assessee has got an option to convert his capital assets into stock in trade (obviously the converse would also be true). As mentioned earlier, it has been held by a number of courts that once a piece of asset is held by an assessee as investment in the books of accounts, the gain arising on the transfer of said asset shall have to be treated as capital gains {Heritage Estate Pvt. Ltd. 213 CTR 275 (Bom)}. Similar view has been taken by the Hon'ble Mumbai Bench of ITAT in a number of decisions, some of which are delineated below:- i) J.M. Shares & Stock Broker, 109 TT J 311 (Mum). ii) Management Structure & Systems Pvt. Ltd., 41 DTR 426 (Mum). iii) Bharat Kunverji Kenia, 8 ITR (Trib.) 325 (Mum). 2.4.11 Reliance has also been placed on Circular No.4 of 2007 dt.15.06.2007 of CBDT where it has been held that "an assessee is not prevented from converting the stock in trade into investment and holding the same as investment thereafter. It has also been mentioned that the entire land which was treated as investment has been sold as one block and hence, it cannot be also said that there was an intention to reap the benefits in part which could give a tint of business activity to the transaction carried out. As mentioned earlier, it has been reiterated that the appellant has no expertise to develop the land and even in resped of sector 'A' which was to be developed, despite a lapse of twenty years, the said project has not been completed and hence, the Ld. AO's observations that the appellant had an intention to develop the entire land has no basis. It has also been mentioned that the purchasers of the land from the appellant were summoned by the Ld. AO. and their statements were taken on oath to verify whether any development was ever carried out by the appellant on the land which was sold to them. They denied the Page 7 of 12 ./2014 8 (Assessment Year : 2009-10) allegation against the appellant. Thus, according to the Ld. AR, all the facts pointed out only to one thing that there was no intention to develop the said land as a business venture nor was any activity ever carried out in the said piece of land, a fact which was confirmed by the third party i.e. purchasers of the land from the appellant as well as verification carried out by the Income tax Inspector during the course of assessment proceedings for A.Y.2008-09. 2.4.12 It has also been stated that without prejudice to the stand taken. by the appellant, even if it was assumed that the appellant was in the business of purchase and sale of land, it could not be held that every piece of land which it purchased had to be necessarily sold as a business venture and it was permissible under the law, as held by various courts, for even a builder to hold a land as an investment and any gain arising on the sale of such land held as investment has to be brought to tax as capital gains. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Bengal & Assam Investors Ltd., 59 ITR 547 (SC) and Dalhousie Investment Trust Co. Ltd. 66 ITR 473 (SC) in respect of the fact that an assessee has a right to treat any part of its assets as an investment even after it was carrying business activity in respect of certain other assets. Ld AR has also relied on a host of other decisions in support of his claim that the appellant could both be an owner of business asset as well as investment asset and it all depends on the facts of the case which in the instant case point only to one fact that the land in question was always held as investment asset. 2.4.13 To summarize, following has been stated:- i) There was sufficient compliance with CBDT Circular No.4 of 2007 dated 15.6.2007 which lays down test to justify between assets held as stock in trade and assets held as investment. ii) Treatment in the books of accounts from 1.4.2000 completely removed any doubts whatsoever regarding the nature of the said asset as investment. iii) The said conversion of land into investment was accepted by the department after due verification u/s. 143(3) in AYs. 2006-07 and 2008- 09. iv) Statements of purchasers of land from the appellant were recorded by the Ld. A.O. who confirmed the fact that the land was non agricultural and that they had obtained N.A permission on their own after the sale of the land by the appellant firm. v) Role of consistency demanded that the investment in plot of land and the treatment in the books of accounts having been accepted in the past could not be suddenly changed without bringing anything on record. ./2014 9 (Assessment Year : 2009-10) vi) Plots held for development purposes were shown separately in the appellant's Balance Sheet as WIP and the plots held for investment were shown as investment even in the balance sheets for A.Y.2006-07 to 2008-09. vii) The plots were always valued at cost year after year and not at cost or market price whichever was lower and hence, the same could not be treated as stock in trade. viii) The appellant firm had not completed even a single project in last 20 years and hence, it could not have undertaken to develop a township. ix) Appellant's intention to hold the land as investment was supported by various facts including the non developable nature of the plot. x) A substantial period of holding i.e. more than twenty years clearly suggested that the land was held as investment. xi) Without prejudice submission has been made to seek benefit of section 45(2). 2.4.14 In view of the detailed discussion above and the comprehensive submission made by the Ld. AR, I am in full agreement with him that the appellant's case does not call for any interference in so far as treatment of land as investment is concerned. Therefore, the action of the Ld. AO in interfering with the entries made w.e.f. 1.4.2000 was completely uncalled for without bringing anything to the contrary on record to suggest that the appellant was a dealer in land. The said piece of land has been held for over 20 years without any development potential or even laying of an inch of brick on the same and therefore, in all fairness, claim made by the appellant regarding LTCGs cannot be faulted. Accordingly, Ground No.2 has to be allowed in so far as treatment of the nature of income is. concerned.
5. Against the above order of CIT(A), revenue is in appeal before us.
6. It was vehemently argued buy ld. AR that after purchase of land in the year 1986, major part of the same was held as investment and not as stock-in-trade. The assessee firm has also passed accounting entries on 1-4-2000 to show in its books of accounts that the firm held the said part of land as investment and ever since the said asset was being shown as investment. He also invited our attention to the scrutiny assessment framed u/s.143(3) to show that in the assessment year 2006-07 and 2008- 09, the AO has deeply examined the fact that assessee has held the land as investment ./2014 10 (Assessment Year : 2009-10) and not as stock-in-trade. As per ld. AR the right of the assessee to treat an asset and hold it as investment is supported by decision of Hon’ble Supreme Court in the case of Sir Kikabhai Premchand, 24 ITR 506 (SC) and Bai Shirinbai K. Kooka, 46 ITR 86 (SC). He further placed reliance on the detailed finding recorded by CIT(A) to the effect that the land was held by assessee as investment, therefore, capital gain arose on its sale was correctly held by CIT(A) as capital gains.
7. On the other hand, ld.DR contended that assessee was in the business of construction and development and land was purchased for developing housing project, on part of the land assessee has developed a housing project income of which was offered as business income, therefore, assessee was not free to treat major part of the same land as investment. He contended that the AO has correctly computed the gain arising on sale of this land as business income.
8. We have considered rival contentions and carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements cited at bar in the context of factual matrix of the case. From the record we found that after purchase of land in the year 1986, the assessee had debited the cost of purchase of plot to the land account and not to the stock-in-trade account and had apportioned only that part of the land to the work-in-progress account which was intended to be developed and earmarked as Sector-A. On 1-4-2000 the assessee had also passed entries in its books of account to show that said part of land “Sector-B to G” held as investment and ever since the said asset was being shown as investment. We had verified the respective balance sheet of preceding years as placed on record and found that major part of the land was shown as investment and not as stock-in-trade or current assets. The fact that land had been held as investment was also examined in scrutiny assessment by the AO for the assessment year 2006-07 and 2008-09. Even during the course of assessment proceedings for assessment year 2008-09, an Inspector was deputed to verify the correctness of the status of the land and to find out Page 10 of 12 ./2014 11 (Assessment Year : 2009-10) if any construction was carried out in the said plot. On inspection the said land it was held as investment and no construction activity was carried out thereon. The CIT(A) has dealt with the each and every objection of the AO and recorded a finding to the effect that assessee had consistently held and shown the land as investment w.e.f.1-4- 2000. The CIT(A) also found that assessee was consistently maintain its books f account wherein land was shown as investment, cannot be brushed aside without any contrary material brought on record by the AO to suggest that in the entry made by assessee, it had some intention to develop the said piece of land. As per Section 45(2), the assessee has got an option to convert his capital assets into stock in trade. Once a piece of asset is held by an assessee as investment in the books of accounts, the gain arising on the transfer of said asset shall have to be treated as capital gains. We found that the CIT(A) has correctly appreciated the facts of the case and after applying judicial pronouncements as laid down by the Hon’ble Supreme Court and Hon’ble High Court as discussed in his order, came to the conclusion that treatment in the books of accounts from 1.4.2000 completely removed any doubts whatsoever regarding the nature of the said asset as investment. A finding of fact has also been recorded to the effect that conversion of land into investment was accepted by the department after due verification u/s. 143(3) in AYs. 2006-07 and 2008-
09. We also found that the statement of purchasers of land from the assessee were also recorded by the. A.O. who confirmed the fact that the land was non agricultural and that they had obtained N.A permission on their own after the sale of the land by the assessee firm. We also found that Plots held for development purposes were shown separately in the assessee’s Balance Sheet as WIP and the plots held for investment were shown as investment even in the balance sheets for A.Y.2006-07 to 2008-09. We also found that these plots were always valued at cost year after year and not at cost or market price whichever was lower and hence, the same could not be treated as stock in trade. The detailed finding recorded by CIT(A) to the effect that land was held as investment, is as per material on record. We, therefore, do not find any reason to interfere in the findings of Page 11 of 12 ITA no.337/Mum./2014 12 (Assessment Year : 2009-10) the CIT(A). Nothing was brought on record by ld. DR to controvert the finding of the CIT(A). In these circumstances, we do not find any reason to interfere in the findings of CIT(A) so as to tax the gain arising on sale of plot as capital gains rather than business income.
9. In the result appeal of the Revenue is dismissed. Order pronounced in the open court on this day of 16th December 2015.