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Bharat Khatiwala Versus Income tax Officer-2 (3) (2) Mumbai.

2015 (9) TMI 953 - ITAT MUMBAI

Treating the built up area of a property as stock-in-trade instead of part of the capital asset - Disallowance of benefit of indexation on capital gains - Held that:- The assessee had not sold any part of the property except the above mentioned two flats, that he had rented out his share of property to have constant rental income,that the income earned by the assessee was capital gains and not income from business or trade, that the assessee had parted his right to the extent of 50% of the land, .....

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ad sold two units and was having rental income from the remaining flats he was offereing the rental income under the head ‘house property income’.

The assessee was not carrying out any business,that the built up area was not stock in trade and that he was entitled to the benefit of inflation index - Decided in favour of the assessee. - ITA No.8711 & 8712 - Dated:- 28-8-2015 - Sh. Joginder Singh and Rajendra, JJ. For The Assessee : Ms. Ritika Agarwal For The Revenue : Shri Jeetendra Ku .....

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jecting the appellant's contention that he never carried out any business activity and the built up area received from M.s Romell Developers being part of the compensation for transfer of part land was in the nature of capital asset. 2. BECAUSE ld. CIT(A) erred in law and facts in upholding the observation of the AO and rejecting the contention of the appellant that as a result of transfer of land to M/s Romell Developers the 'nature' of capital asset changed from land to builtup are .....

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withdraw any of the ground. ITA No.8712/Mum/2010 The appellant individual is aggrieved by the order passed by ld. CIT(A)-VI, Mumbai u/s 143(3) r.w.s.147 and 143(3) of the Income- tax Act, 1961 and is in appeal: 1. BECAUSE, ld. CIT(A) erred in law and on facts in upholding the decision of the ld. AO that the sale of built up area received from M/s Romell Developers has resulted in 'Business Income' and not 'Long Term Capital Gain' thereby disallowing the claim for indexation and b .....

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the contention of the appellant that as a result of transfer of land to M/s Romell Developers the 'nature' of capital asset changed from land to builtup area since there was no such activity or intention on the part of the appellant, to carry out the business of construction. The appellant craves leave to add, alter, amend, modify, delete or withdraw any of the ground. Assessee,an individual,filed his return of income on 20.1.06 declaring total income of ₹ 6.25 lacs.The Assessing .....

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herein some documents relating to transaction of sale of property by assessee jointly held with AK were found.During the course of survey it was found that assessee alongwith AK was owning land at Vakola, Santacruz, that both were having 50% share, that the property was purchased by Hiralal Kathiwal on 25.1.54, that by an indenture dated 1.9.1997 the said property was transferred in favour of Hiralal Kathiwal (HUF), that on 11 .2.2000 the members and co-partners of said property by mutual agreem .....

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m and Rommel Property Pvt. Ltd. (RPPL),that an amount of ₹ 25lacs was to be paid to each of the owners for transfer of development rights, that vide agreement dated 28.8.2001 between the owners and RPPL it was decided that the owner would surrender 55% of the property, that the developer would hand over 45% of the constructed area to the owners, that they would in turn divide the constructed area in equal shares,it was also decided that ₹ 50 lacs was to be taken as share for transfer .....

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it filed revised return and had declared above transaction for AY 2005-06. He directed the assessee to explain as to why capital gain should not be calculated in the previous year relating to the year 2001-02. Vide his letter 27.12.2000,he replied that he had received a token amount in the year 2000 and 2001,that the flats were about to be constructed, that the cost of construction was not known in that year,that it was not possible to ascertain the amount which was going to be received by the .....

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ction,that he should have offered capital gain for surrender of 55% of land in the AY 2003-04, that he had received multiple dwelling units from RPPL,that the sale of dwelling units was adventure in the nature of trade, that 22.5% of land held by him on which the building was constructed would partake the colour of investment converted into stock in trade, that Long Term Capital Gain(LTCG) was attracted. The AO calculated LTCG at ₹ 10.26 lacs. He further held that assessee had sold two fla .....

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d been selling the flats in earlier years also, that the entire exercise taken up by the assessee was adventure in the nature of trade and was for realization of sales value of flat. He calculated the business income of the assessee at ₹ 24.74 lacs. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).After considering the submission of the assessee and the assessment order the FAA held that the AO had taken contrary stand in various .....

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on,that the three limbs of same trasaction were taxed in three different AY.s. under two different heads of income, that Vakola land was to be treated as capital asset, that income arising on its transfer to be treated as business gain.He directed the AO to suitably modify the order. He further held that the develo -pment agreement as entered into on 28.01.2001 achieved certainty and finality in pursuance of conciliation deed dated 05.04.2004, that it was finally executed during AY 2005-06,that .....

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business income.The AR relied upon the cases of Jaitrikanand Rao (60 SOT 189); Smt.Vasavi Pratap Chand(90 TTJ 217).Departmental Representative (DR) supported the order of FAA and contended that the assessee was carrying on systematic activity. 5.We have heard the rival submissions and perused the material before us.We find that the assessee owned 50% of plot of land in village Loe Kalyan, Vakola Mumbai and 50% belonged to his sister in law, that the land was originally purchased by father of th .....

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7; 25 lacs each from RPPL in instalments as deposit against final consideration for transfer of land for the purpose of redevelopment,that on 28.8.01 they entered into a development agreement with RPPL,that it was agreed by both the sides that the owners would surrender 55% of the land through RPPL and would received built up area as set out in the agreement apart from ₹ 25 lacs cash consideration,that due to disputes between the co-owners and the developer a conciliator they appointed,tha .....

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stock in trade and held that the assessee had carried out business activity and the built up area received from RRPL was not part of capital asset,that the FAA upheld the both the findings of the AO,that the FAA disallowed theclaim for indexation and beneficial rate to the assessee with regard to the transaction in question,that he held that income was to be taxed in the AY.2005-06. As far as year of taxability is concerned,we are of the opinion that the FAA had rightly held that income was to b .....

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ave been treated as stock in trade.The compensation received by the assessee in cash or in form of flats was part of the compensation for transfer of the plot of land.In short,the basic ingredients of business were missing in the transaction before us. Here,we would like to refer to the case of Vasavi Pratap Chand(supra).In that matter a property comprising of a house and an open land around it totalling 2.85 acres was purchased by Sumer Chand around 1947.After his death in 1951,Pratap Chand suc .....

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as shown at ₹ 6 lakhs approximately in all.The three co-owners made a collaboration agreement with Ansal Properties and Industries Ltd. for developing the land and getting flats built on it. As per the agreement, the assessee along with other co-owners got built up area of 89136 sq. ft. which was 56% of the total built up area as their share. Thereafter, the three coowners entered into agreements with various buyers and sold the flats during the previous year relevant to AY.s. 1993-94 to 1 .....

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of trade and accordingly, directed the AO to compute the cost of acquisition as well as the income under the head "capital gains".In the fresh assessment proceedings,the AO rejected the cost of acquisition @ ₹ 1,450 per sq. ft. adopted by assessee.He adopted the cost of acquisition of the entire property at ₹ 6,10,000 as per the wealth-tax record.The the indexed cost of acquisition was worked out to ₹ 3,30,060.He worked out the share of the assessee at ₹ 1,56,56 .....

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what was being received. In the case of exchange, the price of both the assets would be the same. So, when the assessees had agreed to transfer 44 per cent of land, it must have kept in mind the value of construction of 56 per cent of built up area. Therefore, we are of the considered opinion that consideration for the transfer of 44 per cent land was the cost of construction of 56 per cent built up area which was to be incurred by the builder. This very sum would also amount to investment by a .....

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tention of the assessee's counsel that it was a sale of improved asset and consequently, cost of acquisition would include the cost of flats as well as cost of land. As far as cost of flat is concerned, we have already observed that it would be equal to the cost of construction of 56 per cent of the built up area. The reason is obvious. The sale consideration of 44 per cent land was in kind and, therefore, it also amounted to investment in the construction of built up area. Hence, the same w .....

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is allowed only with reference to long-term capital assets. We are concerned with the property comprising of two different capital assets acquired at different point of time. As far as land is concerned, admittedly, it is long-term capital asset and consequently, cost of acquisition which may be determined by the AO as per our direction would further be enhanced as per the rule of indexation. However there is some confusion regarding the date of acquisition of 56 per cent built up area. As poin .....

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red to the file of AO for determination of the cost of acquisition/indexed cost of acquisition and also the capital gain assessable to tax in accordance with the directions given by us. We would also like to refer to the matter of Jaitrikanand Rao (supra).In that matter the assessee had entered into a development agreement,vide which,the developer had to bear the cost of demolishing the old structure and had to construct the building without charging any amount from the assessee n lieu of that t .....

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ee was carrying out business activities.On appeal,the FAA held that the income derived by the sale of flat was capital gain,that the cost of construction in the hands of the assessee was the amount for which he had transferred the TDR rights.He also allowed the benefit of indexation at the cost of acquisition proportionately of land.Deciding the appeal filed by the AO,the Tribunal held that the assessee had not sold any part of the property except the above mentioned two flats, that he had rente .....

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