DCIT, CIRCLE-2(3), SURAT vs. SWASTIK ENTERPRISES, SURAT

On the facts and circumstances of the case and in law, the appellant craves its right to add, alter, amend, deleted, any of the ground or grounds of appeal

The ld. CIT(A) after considering the assessment order and the submission of assessee held that the only issue before him is to decide whether the impugned gain is to be taxed under head ‘Business income’ or ‘capital gain’. To decide such issue, one has to first decide 7 DCIT Vs Swastik Enterprises whether the treatment given in Income Tax Act is to be based solely on accounting entry or on the intrinsic nature of transaction or whether the accounting treatment given by assessee should be the sole criteria for deciding the treatment under the tax law. The ld. CIT(A) noted that the taxability of treatment under Income Tax Act cannot be left on the will of assessee, who could make convenient entry in the books of account to avoid taxes. Hence, the accounting entries cannot be the sole criteria. The ld. CIT(A) by referring the case of Natinkant Ambalal Mody Vs SAL Narayan Row (1966) 61 ITR 428 (SC) held that method of book keeping followed by an assessee would not decide under which head a particular income will go. The ld. CIT(A) further noted that the Hon’ble Jurisdictional High Court in Pr.CIT Vs Kalptaru Power Transmission Ltd. (2017) 148 DTR 257 has held that if income does not at all, arise there cannot be a tax, even though in book keeping an entry is made about a hypothetical income which did not materialise.

The ld. CIT(A) further noted that the land was brought as a capital by the partners in A.Y. 2007-08. The partnership deed provides that the land will be treated as an asset of the firm on its being registered in the name of firm. The registration in the name of firm was not happened till date of sale. The sale was executed by partners as a seller. However, the capital gain offered in the hand of assessee firm as land was shown as WIP in income tax return. The assessee explained that the WIP was shown due to mistake of accountant but 8 DCIT Vs Swastik Enterprises the intention of assessee firm was to hold it as capital asset which is evident from their conduct. It was also argued that if the assessee firm intended to treat the land as stock in trade, it would not have held it for seven years and would have developed into layout divided into smaller plots and sold it. The ld. CIT(A) held that the land was not developed, no layout or plotting was done. A compound wall was built for protection against encroachment or illegal occupation. The incremental and FSI charges were paid in F.Y. 2010-11 and 2011-12. No other activities were made in the impugned land for seven years. The ld. CIT(A) on the basis of his observation held that the long holding period and absence of any activity for division of land into smaller plots, so the intention of assessee to hold the land for investment for its own business or for appreciation. A business venture required application of mind, efforts, employment skill and time by partners or by employees, no such application is seen in this case. The assessee firm has no office nor debited any expenses since inception. No utilization of human capital or man power. The assessee has not borrowed any capital etc. The ld. CIT(A) also referred certain case laws in para 7.5 of his order wherein gain on sale of land was held as business income wherein the lands were purchased and sold after plotting of land or after conversion into building site which was treated as business income and gain on such sales were treated as business income. The ld. CIT(A) held that no such activities are done by 9 DCIT Vs Swastik Enterprises assessee, therefore, the sale of land cannot be said to be a business transaction, despite the fact that entries as WIP and the gain made by firm is treated as capital gain in the hands of firm. On the aforesaid observation, the ld. CIT(A) reversed the action of Assessing officer and directed the Assessing Officer to treat the surplus earned on the sale of plot as ‘capital gain‘ in place of ‘business income’. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before this Tribunal.

We have heard the submissions of learned Commissioner of Income Tax/ Departmental Representative (ld. CIT-DR) for the revenue and the learned Authorised Representative (ld. AR) of the assessee. The ld. CIT-DR for the revenue submits that the assessee firm has shown long term capital gain on the sale of land, which was introduced by its partners as their capital contribution as business current asset. The said land was reflected as WIP in the balance sheet of the assessee firm. Such fact is clearly discernible in the balance sheet of assessee as on 31/3/2011 wherein vale of WIP is shown at Rs. 1.56 crores as on 31/3/2012 and value of WIP at Rs. 1.78 crores as on 31/3/2013. Once the assessee firm itself considered the asset which is shown as WIP in the balance sheet, thus the land was the business asset. The ld. CIT- DR invited our attention on the balance sheet wherein the assessee has shown WIP of Rs. 1.78 crores as on 31/3/2013. Further in the capital account of assessee, the same land was shown as capital 10 DCIT Vs Swastik Enterprises contribution. The ld. CIT-DR for the revenue submits that once the partners have introduced the said land as a business asset in the firm, the balance sheet of the firm shown it was a WIP. No further question should be raised in respect of nature of asset and the matter should come to an end without any further doubt or question mark. On perusal of copy of balance sheet, it is clear that the assessee had himself categorised the asset as business asset. The partnership was constituted with the object of doing real estate business and reflecting the asset as a business WIP are major factors which cannot be ignored. The assessee may had not commenced any business activity but introduction of land as capital contribution and holding of land and making payments to Surat Municipal Corporation as incremental charges and FSI charges were definitely for the purpose of business. Non-execution of business will not convert the stock in trade into capital asset automatically. The entries in the books of account and final balance sheet did not show any intention of partners of converting the stock into capital asset. Hence, the income arises on account of sale of WIP cannot be treated as long term capital gain which is nothing but a business income. The assessee himself has admitted before the ld. CIT(A) that they have paid incremental charges and charges of FSI in the office of Surat Municipal Corporation. Such charges can only be paid when the agricultural land was converted into non-agricultural land which itself clearly shows that the assessee was 11 DCIT Vs Swastik Enterprises holding the land for business purposes only. The ld. CIT-DR submits that the assessee firm as per the partnership deed dated 02/10/2006, the partners brought the agricultural land, owned by them in their individual capacity as a capital contribution in firm. Further, the agenda provided that the said land shall be treated as asset of the firm on being registered in Form 7/12 record in the name of firm once the land was introduced as a capital contribution.

The ld. CIT-DR for the revenue further submits that when the land is not the asset of the firm, then how the capital gain can be arose in the hand of assessee-frim. The assessee had shown the land as WIP, therefore, the business nature of income was decided on facts. The method of booking keeping followed by assessee would not decide under which head the particular income will go. To support his submission, the ld. CIT-DR relied on the decision of Hon’ble Supreme Court in the case of Natinkant Ambalal Mody Vs Sal Narayan Row (supra). The ld. CIT-DR submits that the various case laws relied by the ld. CIT(A) in his order are not applicable on the facts of the present case rather to some extent support the revenue. The ld. CIT-DR for revenue finally submits that the assessee firm cannot be allowed to blow hot and cold together. On one hand, the land was introduced as capital contribution, thereafter it was allegedly sold by partner and again surprisingly the capital gain is again shown in the hand of DCIT Vs Swastik Enterprises assessee firm. The ld. CIT-DR prayed to reverse the order of ld. CIT(A) and to restore the order of Assessing officer.

On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR submits that the assessee is a partnership firm. The firm is not engaged in any business or other activity since its inception. In the return of income for A.Y. 2014-15, the assessee firm declared long term capital gain of Rs. 8.70 crores on sale of impugned land. The land under consideration was agricultural land purchased by Shri Jagdishbhai Gadhiya and Bharatbhai Patel in their individual capacity. The firm was constituted vide partnership deed dated 23/01/2004. The partners of the assessee firm agreed to introduce the agricultural land in their firm as capital contribution. However, for the purpose of effectively transferring the agricultural land in their firm, certain legal formalities were to be carried out by the partners of the firm. Such formalities are recorded in the various recitals/clauses of partnership deed. The assessee firm never undertook any business on such agricultural land. No financial activities resulting transaction of single rupee was carried out with any person to exploit the said agricultural land so as to treat it as adventure in the nature of land. The agricultural land was converted into non-agricultural land in 2007. The partners of the firm never intended the process of legally transferring the agricultural land so as the name of firm is recorded in Form 7/12 extract in the office of revenue authorities. As per law, the 13 DCIT Vs Swastik Enterprises partnership firm cannot start business unless the impugned land is registered in the name of firm. After conversion of land into non- agricultural land, the firm has not taken step in its name to register the name of assessee in revenue records. The land was never used as a business asset. The ld. AR for the assessee further submits that as per the clauses in the partnership deed, the land was to be treated as asset of the firm only on registration in Form 7/12 record. The firm could not initiate business as the land was not registered in revenue record. The intention to do business will materialize only when the land become the asset of firm. So it can be said that there was no intention to do business. The firm was not registered for service tax. The land was held for almost 10 years. The appreciation in the value of land was only due to efflux of time and not on account of any business activities. The Assessing officer treated the and as business asset on the ground that in the books of account, the assessee has shown WIP. Such entry was made by mistake as shown the land as WIP. The value of WIP only represent the land and expenses for wall, FSI charges and incremental charges paid to Surat Municipal Corporation which was debited to the WIP. Such expenses were not incurred to do any business but were incurred to protect the land and enhance the value of land. The assessee firm was not the legal owner of the asset. The capital gain should be arising in the hands of partners who sold the land and who did not execute the document on behalf of firm. No 14 DCIT Vs Swastik Enterprises income from business or capital gain arises in the case of assessee- frim. The ld. AR further submits that the FSI charges was paid by the firm but legal ownership vested with the partners and therefore, partners are benefitted until the firm became legal owner of the land. The FSI charges were paid to get the appreciation of value of land. On the specific submission of ld. CIT-DR that the assessee has shown capital gain in the name of firm and FSI and other charges were incurred by the assessee firm, the ld. AR submits that due to mistake, the land was shown as WIP although there was no WIP, so the mistake was apparent. To support his submission, the ld. AR of the assessee in his written submissions has relied on the following case laws:  Nalinkant Ambalal Mody Vs S.A.L. Narayan Row, CIT (1966) 61 ITR 0428 (SC),  D.L.F. Housing & Construction (P) Ltd. Vs CIT (1982) 9 Taxman 207 (Delhi),  CIT Vs India Discount Co. Ld. (1970) 75 ITR 0191 (SC),  CIT Vs Suresh Chand Goyal (2007) 163 Taxman 54 (MP),  Automobile Products of India Ltd. (1983) 140 ITR 159 (Bom),  Gordhandas Trikambhai Patel (1979) 118 ITR 81 (Guj),  Kettlewell Bullen & Co. Ltd. (1964) 53 ITR 261 (SC),  Tribhuvandas Vallabhdas s CIT (1966) 61 ITR 518,  G. Venkataswami Naidu & Co. Vs CIT (1959) 35 ITR 594,  Vasupujya Properties Pvt. Ltd. and Ors. Vs ITO (ITA 912 to 923/PN/2002) (Pune Trib) order dated 31/05/2006.

At the time of making submissions, the ld AR for the assessee relied on the following case laws;  CIT Vs India Discount Co. (1975) 75 ITR 191 SC, 15 DCIT Vs Swastik Enterprises  Smt. Indiramati Bai & Others Vs ACIT (1983) 200 ITR 594-SC,  Raja J. Rameshwar Rao Vs CIT (1961) 42 ITR 0179 SC,  CIT Vs Suresh Chand Goel (2007) 164 TAXMAN 54 (MP HC) and  Hariom Associates Vs ITO (ITA No. 1516/Pun/2016).

We have considered the rival submissions of both the parties and have also gone through the orders of the lower authorities carefully. We have also deliberated on the various case laws relied upon by the lower authorities as well as by the ld. AR of the assessee. We find that in the return of income, the assessee firm had shown capital gain on sale of impugned land in the hand of assess-firm. However, the Assessing officer treated the said gain as ‘business income’ by taking a view that assessee had mainly countered that the asset in question is a capital investment and not a business asset. The Assessing Officer held that assessee is a partnership firm, the partners have introduced land as business current asset in the firm, the balance sheet of the firm shows it as WIP, the matter ends without any further question mark. The assessee had himself categorized the asset as business asset. The Assessing Officer held that the assessee is trying to put in that the asset is a capital asset. The formation of partnership with objects of doing business in real estate and reflecting the asset as business WIP are major factors which cannot be ignored. The assessee had not commenced any business activity but the holding of the land was for the purpose of the business. Non commencement of business does not convert the Stock in Trade into Capital Asset, automatically. The 16 DCIT Vs Swastik Enterprises entries in the books of account and the final balance sheet also did not show the intentions of converting the stock into capital asset. Some part of the land is still on hold as per the balance sheet as business WIP and treated the gain on sale of plot as business income in place of capital gain.

The ld. CIT(A) reversed the action of Assessing Officer by taking a view that long holding period and absence of any activity for division of land into smaller plots, so the intention of assessee to hold the land for investment for its own business or for appreciation. A business venture required application of mind, efforts, employment skill and time by partners or by employees, no such application is seen in this case. The assessee firm has no office nor debited any expenses since inception. No utilization of human capital or man power. The assessee has not borrowed any capital etc. The ld. CIT(A) referred certain case laws wherein gain on sale of land was held as business income wherein the lands were purchased and sold after plotting of land or after conversion into building site which was treated as business income and gain on such sales were treated as business income. The ld. CIT(A) held that no such activities are done by assessee, therefore, the sale of land cannot be said to be a business transaction, despite the fact that entries as WIP and the gain made by firm is treated as capital gain in the hands of firm.

The ratio in series of case laws relied by ld AR for the assessee are not applicable on the facts of present case. In all case laws facts are quite different. The first three cases referred in para-10 above deals with the treatment accounting entry. The case law at serial No. 4 in Suresh Chand Goel (supra), the land was sold by making plotting, the land was sold in individual capacity, however, in the present case the land was introduced as capital contribution as business asset in the firm. Similarly, in none of the case, as relied by assessee, there was no dispute on the nature of asset. The facts in the present case is unique 19 DCIT Vs Swastik Enterprises as initially it was introduced as capital contribution, development charges of FSI was paid in Surat Municipal Corporation, it was sold in individual capacity but capital gain was again shown in the hand of assess-firm, when such glaring fact was detected by assessing officer, the partner took the plea that accountant committed mistake, which was never corrected. In the result, the grounds of appeal