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2015 (10) TMI 2173 - ITAT MUMBAI

2015 (10) TMI 2173 - ITAT MUMBAI - TMI - Sale of premises - Long Term Capital Gain OR Business Income - assesse submitted that the assessee has let out this 7th floor at ‘Span Centre’ since its construction and income from house property since beginning has been offered for taxation as ’Income from house property’ which has been also assessed by Revenue u/s 143(3) of the Act read with Section 143(2) of the Act for assessment year’s 2004-05,2005-06 and 2006-07 - Held that:- The contention of the .....

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ear to year till 31-3-2006. The assessee has manifested its intention to convert the said trading business asset into Investment in its books of accounts on 1-4-2006 when the book entry was passed and hence the said asset at best can be held to be ‘Investment’ w.e.f. 01-04-2006. The contention of the assessee that it has shown income from rent of these unsold flats as ‘Income from house property’ and hence the sale proceeds of the said flat shall be chargeable to tax as ‘Income from Capital Gain .....

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fest its intention by taking steps to change the character of the said asset by amending its books of accounts and also bringing the same on record with Revenue which in the instant case was done by the assessee on 01-04-2006.

We, therefore, upheld the order of Assessing Officer and reverse the order of CIT(A). hence, The gain from sale of 7th Floor, Span Centre was rightly brought to tax by assessing officer as ‘Income from business’ or alternatively, even if it is assumed that the a .....

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of revenue.

Disallowance of expenditure incurred on cost of improvement of property while computing the capital gain - CIT(A) allowed the claim - Held that:- hese assets are not towards the cost of the improvement of the property as there is no improvement in the property itself by installing Air Conditioners, Work Station, Office Tables, Working Tables, Meter Room, Electrical Fitting, Bathroom Toilet Fittings, Smoke Detectors, Pantry etc. However, since the assessee has acquired the .....

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hereby upheld but subject to our holding in the preceding para’s that the income from sale of the flat at 7th floor, Span Centre shall be charged to tax as income from business - Decided against revenue. - ITA NO 678/Mum/2011 - Dated:- 24-9-2015 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Revenue : Shri Vijay Shankar For The Assessee : Shri Prakash Pandit ORDER Per Ramit Kochar, Accountant Member This is an appeal filed by the Revenue against the order pa .....

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e and in law, the Learned CIT(A) has erred in holding that the consideration on sale of premises of ₹ 2,99,83,446/- viz. 7th Floor of Span Centre is Long Term Capital Gain and not Business Income made by AO in his assessment order, ignoring the fact that :- (a) The assessee has never ever treated the work in progress /cost of unsold flats as an investment item in the Balance Sheet except in the current assessment year. In all the project of the assessee, the assessee has always taken the w .....

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in law, the Learned CIT(A) has erred in allowing the expenditure incurred on cost of improvement of property of ₹ 5,00,000/- while computing Long Term Capital Gains which was disallowed by the AO, ignoring the fact that :- (a) The list of improvement cost contains Air Conditioners, Work Stations Office Table, Working Table, Conference Room with tubs, chairs and glass partitions tube lights, smoke detectors, spot lights, electrical switchboards, telephone lines, pantry etc. do not form with .....

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for the assessment year 2007-08 declaring total income of ₹ 4,18,02,339/-. The assessee has constructed several buildings including J S Towers and Span Centre . The assessee was offering for tax income from the sale of these building projects. During the assessment year, there was a sale of office premises on 7th floor of the building Span Centre for ₹ 2,99,83,446/- and the income thereof was offered by the assessee for taxation as Long Term Capital Gain instead of offering the same .....

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i.e. assessment year 2000-01. Subsequently, when the construction of 8th floor was completed in the year 2005-06, the same was also treated as Investment. The assessee contended that since the 7th floor of Building Span Centre has been treated as Investment, the capital gain arising on sale should be treated as Long Term Capital Gain as the said capital asset is held for more than 36 months and as such the sale of 7th Floor, Span Centre was not sale of unsold stock. The assessee contended that t .....

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ess(hereinafter called WIP ) in the books of accounts of the assessee. The assessee also submitted that it is regularly paying maintenance charges and taxes in connection with these flat. The Assessing Officer after considering the reply of assessee, held that the contention of the assessee that investment in 7th floor is treated as Investment from financial year 1999-00, is factually incorrect. The Assessing Officer analyzed the P&L Accounts for last ten years starting from the year ending .....

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nder the Act in prescribed form no. 3CD at point 11, whereby the auditors of the assessee have submitted that the assessee is following mercantile system of accounting and there is no change in the method of accounting employed vis-a-vis method of accounting employed for immediately preceding assessment year. The Assessing Officer also held that the assessee has attempted to alter the figure of total asset of balance sheet as on 31.03.2006 in the audited accounts of 31.03.2007, which was increas .....

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tenance charges with respect to these flats are payable by the lessee Alfa Business Centre as per agreement entered by the assessee with the lessee. The Assessing Officer rejected the contention of the assessee and held that even if the assessee has offered the income of rental as Income from house property but the same does not change the character of the asset from being a business to an investment and the Assessing Officer held that the same to be chargeable to tax as income from business. Th .....

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. Span Centre . This commercial project was initially sanctioned for construction of basement + Ground Floor+ 4 Storey building. Except for the basement and ground floor, during the construction stage of the project itself, the assessee sold outright on ownership basis all the commercial units in the building and offered to tax profit earned on sale of the commercial units in the building on the project completion basis in the return of income filed with the Revenue for assessment year 1998-99 a .....

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took further developments rights due to change in development regulation of the government and by acquiring such transferable development rights from the market, the assessee constructed further additional floors viz 5th to 7th floors on the building Span Centre . The assessee contended that the rights for construction of 5th and 6th floor were sold by the assessee but it retained the 7th floor on building Span Centre . Similarly, the assessee also retained the right of development of 8th floor. .....

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remain same till the date of sale of office premises on 7th floor , Span Centre in the assessment year 2007-08 and there is no alteration in these figures since then. The assessee contended that it is important to see the intention for holding the asset which in this case is capital asset and not stock in trade . The character of asset and holding of these asset for nine years shows that there was no intention to sell these assets and intention was to exploit these premises to earn income and he .....

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s although the same is recovered from tenants . The assessee also submitted that it has made investments in the business out of its own funds and no borrowed funds are used and hence the assessee is not under any compulsion to sell these flats. The assessee submitted that if two views are possible, then one favorable to the assessee should be adopted. The CIT(A) after considering the replies and case laws relied upon by the assessee held that the Assessing Officer held the same to be business in .....

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orarily let out till the same was sold. The assessee has already entered into various agreements for the sale of other flats of Span Centre while in the case of 7th floor, it had entered into long term lease to hold the business premise for a long period of time as Investment and not as stock in trade which in this case , the flat at 7th Floor Span Centre is held for about nine years. The CIT(A) held that this premises on 7th floor should be treated as Investment even though nomenclature is WIP .....

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He also submitted that the assessee has regularly showing this unsold stock with respect to the project Span Centre as WIP . He also drew our attention to the Balance Sheet and Profit & Loss account for the year ending 31.03.1999 whereby the closing work in progress was shown at ₹ 4,61,28,079/-. He also drew our attention to the schedule of WIP whereby the WIP of ₹ 22,57,000/- is appearing under the head Span Centre . The Ld. DR submitted that the assessee has since the year 1998 .....

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tion as applicable to Long Term Capital Gains. The Ld. DR also stated that the assessee has made an admission whereby the assessee has admitted before the authorities below that it has committed an error by using the wrong nomenclature as WIP and not converting the property from WIP to Investment in its books of accounts which itself bind the assessee and assessee is liable to pay tax on the profit from sale of this unsold stock viz. 7th floor at Span Centre under the head Income from Business . .....

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, inter-alia , defines capital asset as excluding stock in trade. He also contended that even if the said conversion of stock in trade ie WIP to capital asset is allowed as was done by the assessee as on 01.04.2006, the same should not be treated as long term capital gain as it is held for less than 36 months to be calculated from the date of conversion in the books of accounts of the assessee on 01.04.2006 and it should be treated as short term capital gain as the same is held for less than 36 .....

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ereafter, it was shown in the balance sheet as stock in trade . However, during the financial year in question when the land was sold, the same have been converted by the assessee from stock in trade to investment . Obviously, this change in the books of accounts, just before the sale of the property, was made to avoid payment of full taxes by changing the complexion of the earnings made on the sale of the property. The Assessing Officer, however, still allowed the change but then was right in h .....

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ever, the Tribunal has glossed over a very important and fundamental fact. In quantum proceedings, appeal filed by the assessee i.e. ITA 662/2009 came up for admission on 16th September, 2009. On the same date, appeal was admitted, arguments heard and orders were dictated in the Court dismissing the appeal there and then. In this factual backdrop, when order of the Assessing Officer in quantum proceedings was sustained by all successive authorities and this Court also dismissed the appeal at the .....

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d income from house property since beginning has been offered for taxation as Income from house property which has been also assessed by Revenue u/s 143(3) of the Act read with Section 143(2) of the Act for assessment year s 2004-05,2005-06 and 2006-07. The assessee submitted that entries in the books of accounts are not conclusive and it is important to see the real intention where the flat was held as Investment from the initial stage or not. The assessee relied upon the Judgment of Hon ble Bo .....

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une). The assessee also submitted that if the income from property is taxed under the Income from house property then on sale of such property it could only be taxed as Income from Capital Gains. The assessee relied upon the judgment of Hon ble Calcutta High Court in CIT Vs. Estate of Omprakash Jhunjhunwala 253 ITR 153(Cal). He also placed reliance on the decision of Amritsar Bench of the Tribunal in the case of ACIT Vs. Janak Raj Chauhan [102 TTJ 316(Asr.)] and other judgments to support this c .....

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tia (1976) 105 ITR 179(SC). The assesssee submitted that the business man can hold both stock in trade and capital asset at the same time and there is no bar on such holding. The assessee also relied upon the order of CIT(A). 7. We have considered the rival submissions and carefully perused the relevant material on record and also the case laws relied upon by both the parties. We have observed that the assessee is a builder and is in the business of development of Properties. The assessee has co .....

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ng assets since their construction whereby the cost of construction at ₹ 22.57 lacs was carried as the cost of flats at Span Centre in its books of accounts as WIP being unsold trading stock till assessment year 2006-07. We have observed that assessee has during the assessment year 2007-08, on 01.04.2006 has transferred these flats from WIP to investment which has been admitted by the assessee. The assessee during the period from the date of construction till assessment year 2006-07 was tr .....

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come Tax Act,1961. There are five different heads of income under which the income is chargeable to tax as under: 1. Income from Salaries. The income earned by the assessee from salaries as defined under the Act are chargeable to tax under this head as per applicable provisions. 2. Income from house property- Income earned by the assessee from letting out property is chargeable to tax under this head as per applicable provisions. 3. Income from Business and Profession- Income earned by the asses .....

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t contemplates and postulate applicability of various provisions as contained in relevant sections of the heads of income to compute the income of the assessee in the manner specified in the said sections as per the provisions contained thereat. The income is to be computed strictly as per scheme of the Act and provisions contained there-at by the assessee to bring to the tax , the correct income in the hands of the correct assessee for the correct assessment year at the correct rates of taxes, .....

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e is stipulated u/s 28 to 44DB of the Act and the business income shall be computed accordingly as per provisions of said Sections. For computing the income under the head Capital Gains, the relevant provisions as contained in Section 45 to 55A of the Act gets attracted and Capital Gain chargeable to income tax shall be computed accordingly as per the afore-stated provisions of Section s. Scheme of computing the income under head Income from Business is altogether different from the scheme of co .....

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of CIT Vs. Splendor Construction [ITA No. 1977 of 2010] whereby the Hon ble High Court of Delhi has held as under:- 9. In the facts and circumstances of the present case, we cannot agree with the approach adopted by the Tribunal. We are of the opinion that the Tribunal has side tracked the main issue. It was a case where the land in question was purchased in the financial year 1998-99. Thereafter, it was shown in the balance sheet as stock in trade . However, during the financial year in questio .....

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om stock in trade and not from the date when the land was purchased. Therefore, the gain was to be treated as short term capital gain. The assessee, under the garb long term capital gain wanted to pay lesser tax. It had thus clearly furnished inaccurate particulars of income. 10. The issue was not debatable, as held by the Tribunal in the impugned order. No doubt, appeal was admitted. However, the Tribunal has glossed over a very important and fundamental fact. In quantum proceedings, appeal fil .....

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s, answer both the questions of law in favour of the Revenue and against the assessee and as a consequence allow this appeal partially and set aside the order of the Tribunal and restore that of the Assessing officer limiting the penalty on the aforesaid ground. Our view is further fortified by the existence of Section 45(2) of the Act which reads as under: Section 45 3[(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion .....

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contention of the assessee that it hardly matters how the same is reflected in its books of accounts is erroneous as the law postulate burden on the assessee to reflect the change from stock of unsold stock to Investment . The assessee being in the business of Builders and offering the income thereof as business income, any unsold stock of flat will be presumed to be business trading asset and assessable as such. The assessee has also shown the same as trading business asset in its books of acco .....

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Capital Gain is again erroneous. Hon ble Bombay High Court has held in the case of CIT v. Sane and Doshi Enterprises in (2015) 232 Taxmann 452 that in case of real estate developers , income from rent from unsold stock has to be assessed to tax as Income from House Property . The assessee has also rightly offered to tax income from rent as Income from House Property but that will not change character of the asset from business trading asset ie WIP to investment unless the assessee manifest its .....

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ale of property is not for the genuine reason and hence held that it cannot be treated as Long Term Capital Gain as assessee wanted to reduce tax liability which is not permitted . The case in hand is similar to that decided by the Hon ble Delhi High Court in Splendor Construction(supra), which is discussed above and we also, Respectfully, hold that the same change as done by the assessee changing the character of the work in progress/unsold stock of flats to Investment which is just before the .....

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the same was done on 01-04-2006 and the asset was sold thereafter immediately within the assessment year 2007-08 and hence the asset was held for less than 36 months as Investment as such and the gain arising thereof on sale of such asset shall be chargeable to tax as Income from Short Term Capital Gain but the same cannot be brought to tax as Income from Long Term Capital Gain . We order accordingly. 8. Ground no. 2 relates to disallowance of expenditure incurred on cost of improvement of prop .....

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assets to the assessee for consideration of ₹ 5,00,000.00 at the time of vacating the premises The assessee has sold the said premise at 7th floor of Span Centre in assessment year 2007-08 and has added ₹ 5,00,000/-towards the expenses incurred for improvement of property. The assessee was asked to explain the same as how the same is treated as improvement of the property sold. The assessee contended that these assets were acquired from the tenant at the time of vacation of the offi .....

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l value income from house property in earlier years. 9. Aggrieved by the order of assessing officer, the assessee carried the matter to CIT(A) and reiterated its contentions as raised before assessing officer. The CIT(A) held that the expenditure has been incurred by the assessee on the capital item and hence the same has to be considered as cost of improvement of the asset while computing the capital gain, since the premises have been sold by the assessee inclusive of the assets so acquired , a .....

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The assessee reiterated its submissions as advanced before authorities below and relied upon the orders of CIT(A). 13. We have considered the rival submissions and perused the relevant material on record. We have observed that assessee s tenant M/s Raft Software Pvt. Ltd. has installed various assets like Air Conditioners, Work Station, Office Tables, Working Tables, Meter Room, Electrical Fitting, Bathroom Toilet Fittings, Smoke Detectors, Pantry etc., at its own cost and while leaving/vacating .....

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