TaxTMI 
TaxTMI 
2013 (2) TMI 840
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....tion of the partnership on 31.07.1973, Umaid Bhawan Palace came to the share of the Appellant Company. The assessee-company entered into a Development Agreement on 20.09.2001 with M/s. Ess Gee Real Estate Developers (Ess Gee) to develop a residential colony named as the Umaid Heritage. As per this agreement, the assessee-company was entitled to receive a percentage of sale consideration based on the rate of land which the same has to be sold. The A.O. has computed the amount receivable by the assessee-company from the sale of plots during F.Y. 2007-08 relevant to A.Y. 2008-09. As per this Development Agreement, ₹ 34,61,32,307/- has been shown as total sale consideration for this year in the Return of Income [ROI] filed for the year for the purpose of computation of Long Term Capital Gain/Loss [LTCG, for short]. The assessee company has computed the long term capital loss in the following manner: Less: (i) Indexed cost of acquisition 1.01.301 sqv X ₹ 250X551 100 13,95,42,128 (ii) Indexed cost of improvement of developed land 2.03.881 sqy X ₹ 250X551 100 28,08,46,078 Long term capital loss 7,42,55,899 Similar calculations were done in respect of gain / l....
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....ee Real Estate Developers Pvt. Ltd. who developed the land and as agreed they retained a part of sale consideration of the land towards development charges. The Business of the Company was not to deal or carry on the business of Real Estate. It is only a surplus land which was decided to be sold. The Assessee Company did not develop the land and this job was assigned to a professional Company who is expert in that field. As the land owned In the Assessee Company was a Long Term Capital Asset hence the income derived from sale of that land has been correctly shown under the head Capital Gains. Your predecessor in your office has correctly assessed the same at the time of original assessment U/s. 143(3) of the Income Tax Act, 1961. As the Assessee Company is not a dealer or developer of Real Estate hence the income received from sale of land is property assessable under the head Capital Gains. However it is submitted that if Your Honour decides to tax this income (although we do not agree to it) from sale of land as business income for that purpose as per the provisions of the law the value of land on the date of its conversion from Stock in Trade to business Asset has to be taken a....
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....en confirmed by the ld. CIT(A) as well vide his order dated 26.12.2011. The assessee is aggrieved and has filed appeal for all the three assessment years before the Tribunal. 5. Grounds raised in A.Y. 2008-09 are common in other A.Ys. i.e. 2006-07 and 2007-08. In A.Y. 2008-09, the following grounds have been raised: "On the facts and in the circumstances of the case Ld. CIT(A) has erred:- 1. In confirming the assessment order passed u/s. 143(3) of IT Act, 1961 and further erred in not holding the same to be, unjust, bad in law and not binding on the appellant and also in not following provisions of law. 2. In upholding Ld. AO's finding that Appellant is carrying on business of dealer or developer of Real Estate since its incorporation and in not considering and disregarding the fact that business of appellant company is of operating Hotels and restaurants and further erred in taxing income received from sale of open land as Income from Business or Profession in place of taxing the same under the head Long Term Capital Gains as declared by the Appellant and not following the provisions of Law and citations of Hon'ble jurisdictional High Court on the subject. 3. In uphol....
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....se funds for renovation/ refurnishing of the hotel property, the assessee-company entered into Development agreement dated 20.09.2001 with M/s. Ess Gee Real Estate Developers (hereinafter referred to as "Ess Gee"), to develop and sell land admeasuring 4,84,000 sq. yds., out of the surplus land, which was not required for running the hotel. As per this agreement, Ess Gee as licensee of the assessee-company was to develop the land and incur expenditure in respect thereof and the appellant as land owner, was entitled to receive percentage of sale consideration of plots sold by Ess Gee. The developed plots were to be sold under tripartite arrangement between the appellant, Ess Gee and the buyer. As a result, during the year under consideration, the assessee-company received sale consideration of ₹ 34,61,32,307 under the head "capital gains". The assessee-company determined loss of ₹ 7,42,55,899 discussed in para 2 of this order. 9. Similar calculations were done in respect of gains/loss under capital gain for A.Ys. 2006-07 and 2007-08. However, the A.O. held the activity of the assessee as adventure in the nature of trade and has computed the income und....
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....saction is in the nature of trade even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly and necessarily to address itself to the legal requirements associated with the concept of trade or business. The final conclusion of the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point: and such a challenge is open under section 66(1) because it is a challenge on a ground of law. If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. In deciding the character of such transactions several factors are relevant. Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it?.... What is the nature and quantity of the commodity purchased and resold?.... Did the purchaser by an....
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....ssessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment. (emphasis supplied) 15. Again, in Commissioner of Inland Revenue v. Fraser: [1942] 24 TC 498,502, Lord Normand has observed as under:- The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity for sale does not occur... An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognize at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realize it at a profit... An accretion to capital ....
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.... motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. 16. It may also be pertinent to reproduce hereunder the observations of the Supreme Court in the case of Janki Ram Bahadur Ram V. CIT: 57 ITR 21, referred in the aforesaid decision, wherein the Court had put the onus on the Revenue to establish that the profit earned in a transaction is in the nature of trade: No useful purpose would be served by entering upon a detailed analysis and review of the observations made in the light of the relevant facts, for no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. If for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where ....
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....estates at a profit: Leeming v. Jones [1930] 15 Tax Cas. 333 (HL), may not be regarded as commencing a venture in the nature of trade. These are cases in which the commodity purchased and sold is not ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture. It may be emphasized from an analysis of these cases that a profit motive in entering into a transaction is not decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit. (emphasis supplied) 17. The following observations of the Supreme Court in the case of Karam Chand Thapar & Bros. (P) Limited V. CIT: 82 ITR 899 wherein their Lordships observed that manner of disclosure in the balance-sheet, though I not conclusive, was a relevant circumstance. In that case the assessee had sold certain shares, which was held to be capital loss. The shares were shown by the assessee as 'investment' in the balance sheet. While holding that the fact that the assessee was showing the shares as investment in its books as well as in the balance-sheet, though by itself not a con....
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....e of trade are circumstances which show perhaps that the assessee expected to make profit out of the land but they do not show that he intended to do business with the land or to enter into an adventure in the nature of trade. (emphasis supplied) 19. Following the aforesaid decision in Bhogilal Patel (supra), the Bombay High Court in the case of CIT vs. Anandlal Becharlal & Co: 107 ITR 677 similarly held that the fact that the assessee held the land for a period of six years of purchase would militate against any inference being drawn that the purchase itself was made with the intention of embarking on a venture in the nature of trade. In that case, the assessee/firm was engaged in the business of purchase and sale of jewellery. The assessee purchased a plot of land at Ghatkopar on 26th November, 1952, which was sold on 16* February, 1959 resulting in profit of ₹ 46,876. The assessee, thereafter, purchased plot of land at Rajkot for an amount little less than the sale consideration/The assessing officer held that the purchase and sale of land at Ghatkopar by the assessee was an adventure in the nature of trade. The assessing officer rejected the contention of the assessee t....
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....he intention at the time of purchase was to merely resell at profit, the asset would be in the nature of stock-in-trade. On the other hand, if the intention at the time of acquisition is to hold the asset for use and/ or earn income therefrom, then the character of such asset would be 'capital asset'/ 'investment' and income from its sale would be 'capital gains' and not business income. 22. Applying the principles laid down in the aforesaid decisions, the Court have held that to determine whether a transaction involving sale of land is in the nature of business, the intention of the assessee at the time of purchase of land is critical. If the intention at the time of purchase of land was not to trade in the land, merely because the assessee proceeds to sell the land owned by developing the same further at any later/ subsequent stage in order to realize the potential of the land, gains realized could not be assessed as 'business income': The Madras High Court in the case of CIT v. MLM Mahalingam Chettiar [1977] 107 ITR 236 following its earlier decision in the case of CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad.) held that developing of....
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....us conduct and the circumstances peculiar to the assessee's case left no room for doubt that the transaction resulted only in capital gains. These facts, found by the Tribunal, are not sought to be challenged by the Revenue in the proposed question. (emphasis supplied) 25. The Allahabad High Court in the case of CIT vs. Mohakapur Ice and Cold Storage: 281 ITR 354 similarly held that in order to treat the transaction as coming within the purview of adventure in the nature of trade, it is to be seen whether the property has been purchased or acquired with the intention to sell the property for profit by involving in several transactions of sale or to earn profit on its investment. In that case, the assessee sold the land acquired and held as investment to one L, who subsequently sold the same to various plot holders, in respect of which sale deeds were executed by the assessee since the land was in the name of the assessee. The assessing officer assessed the profit as one arising from adventure in the nature of trade, which was reversed by the CIT(A). The order of the CIT(A) was affirmed by the Tribunal and the Revenue's reference against the order of the Tribunal was dismi....
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....there is nothing on record to show that the land was purchased, for the purpose of selling into plots. Basically, it is a gifted land and the land was developed and was sold after converting into the plots with a view to secure the better price, therefore, the isolated activity cannot come within the purview of adventure in the nature of trade and business. The main earning on the sale of the land was in the nature of capital gain and, therefore, not assessable as his income from business and this question is essentially a question of fact. 28. It will also be pertinent to note the observations of the jurisdictional Rajasthan High Court in the case of CIT vs. Sohan Khan and Mohan Khan: 304 ITR 194, extracted below: In our view, one of the most significant considerations would be, the regularity of transaction of purchase and sale. Mere fact that there was a series of transactions of sale only, by selling the part of the whole land, purchased in one so, or purchased once upon a time, in piecemeal, would not render the activity of sale to be an "adventure in the nature of trade". In the present case, there is nothing to show that the land was purchased with the intention ....
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....e, the assessee was engaged in the business of manufacture and sale of bhujia, namkeen and sweets. It had purchased certain agricultural land for the installation of factory building. Subsequently, due to urbanization of the area, the factory could not be installed and the assessee, in order to get better capital appreciation, converted a portion of land in the abadi and thereafter sold the same. The Tribunal held that if the intention of the assessee was to retain the asset as capital asset, then, the profit arising from sale of such asset was taxable as capital gains. After relying on the jurisdictional High Court decision in the case of CIT vs. Sohan Khan and Mohan Khan (supra), the Tribunal held that sale of land after development, amounted to disposal of capital asset only, resulting in capital gains and not business income. 32. On a careful perusal of the aforesaid series of judicial precedents, following legal principles may be culled out: (a) on considering whether or not a transaction is an adventure in the nature of trade, the intention of the assessee in entering into a transaction is critical. One of the essential elements of an adventure in the nature of trade is the....
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.... case, it can be instrumental in deciding whether the sale of 'asset' would result in a 'capital-gain' or 'business-income'. These factors are: (1) Intention of the assessee at the time of acquisition of the assets. What is the objective of the assessee at the time of acquiring that asset? If this objective was to acquire it as a capital asset/investment then income arising on its sale, has to be treated as a 'capital gain'. In case this objective was to derive income therefrom for treating it as adventure in the nature of trade or business, like making profit by buying and selling its income or sale thereof has to be treated as a business income. (2) Treatment given to that 'asset' in the books What treatment has been given by the assessee in its financial statements. It is classified as a capital assess/investment, then it is to be treated as such. When it is classified as stock in trade, its sale-proceed has to be assessed as business income. (3) Period of Holding The third important factor is the 'period' for which the asset is held prior to its sale. 34. The Hon'ble Summit Court had long-back laid down the following te....
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....inctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction. Where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it.... The presence of such an intention is no doubt, a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the id initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. (emphasis supplied) 35. Further, similar test was reiterated by the Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd. reported in 100 ITR 706 [SC]. In this case, it has been held thus: ... Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale ....
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.... in the business of purchase and sale of land. It was a reference made u/s. 66(2) of the Act in vogue in that year [i.e. 1940]. So, this decision is of no avail and cannot help the revenue's case. 38. The other decision of Hon'ble Calcutta High Court in the case of Praise And co. [Private] Ltd. Vs. CIT West reported in [1966] 60 ITR 566 Cal was again rendered under the similar circumstances, therefore, the ratio of this case is also not applicable to the present case. 39. Again, the decision of the Hon'ble Bombay High Court rendered in the case of Estate Investment Co. Ltd. Vs. CIT [1980] 121 ITR 580 [Bom] was rendered on distinguishable facts. In that case one of the main objects for which the assessee-company was incorporate was to enter into transactions relating to land and properties. 40. The decision of Hon'ble Apex Court in the case of P.M. Mohammad Meerakhan Vs. CIT reported in [1969] 73 ITR 735 [SC] is also distinguishable. Again the facts of this case are different from the one we are dealing with. In that case from the recital of the agreement dated 15.10.1955 the intention of the assessee in purchasing the estate became clear that it was purchased to ....
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....rms of the Agreement or there is non execution of the project due to Force Majeure. The aforesaid clauses would come into operation only in the event of material breach of the Agreement by the developer / force majeure conditions operating. The said clauses have no relevance during the normal currency of the Agreement and cannot, in any manner, be construed as resulting in the appellant being engaged in the organized and systematic activity of development and sale of plot(s). 44. The development of plot and the construction of villas are two separate and distinct activities. The development of plots is undertaken by Ess Gee under the Development Agreement, in terms of license granted by the appellant as the land owner. The construction of villas is undertaken by partnership firm in which the appellant company is 50% partner, pursuant to an agreement with the developer, viz., Ess Gee and/ or the plot owner. Such an agreement is post handing over of the developed plot to either the partnership firm or the plot owner. In these circumstances, the development of plot and construction of villas thereon by the partnership firm cannot be viewed as one composite integrated activity. 45. I....
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....e material to decide whether the activity carried out by the assessee accounts to mere realization of a capital asset or amounts to carrying on an adventure in the nature of trade. Thus, in the given facts and the circumstances of the case, and in view of the above stated legal inescapable conclusion that follows is that the share of sale consideration received by the appellant from developer on sale of plots under the Development Agreement was in the course of realization of a capital asset held by the appellant for over 30 long years, giving rise to income taxable under the head "capital gains". Such an activity could not, on the undisputed facts of the case, be regarded as carrying an adventure in the nature of trade. Consequently, the orders of the authorities below need to be reversed. 48. On the alternate submissions made by the appellant without prejudice, the ld. CIT DR had only objected to the cost of development of 2,03,881 sq. yds. being taken into account in computing income under the head "business", on the ground that the said land was not developed during the year. In rebuttal, it may be pointed out that the appellant had claimed deduction of the....
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....est if invested in loan market or would have reduced the burden of interest of assessee if loan amount of Financial Institutions had been repaid. vi) Just by way of colourful device this deemed income remains to be taxed in your hands, and on other side you are paying interest expenditure on borrowed funds. 51. From the above, the A.O. has concluded that it is a colourable device to claim interest expenditure in the case of Marudhar Hotels Pvt. Ltd. and bifurcate lease rent consideration into lease-rent-licence-fee and deemed income of interest on deposits against lease agreement. Accordingly, the A.O. proceeded to disallow interest expenditure equivalent to 12% of interest income at normal market rate on ₹ 5 crore, i.e., ₹ 60,00,000/-. The assessee-company objected to the above proposal sent through letter dated 08.12.2010 to it. The assessee-company replied vide letter dated 14.12.2010 as under:- The Assessee Company has borrowed loans from Banks and Financial Institutions. These loans have been utilized for the purposes for which those were granted by the Bank or Financial institutions to the satisfaction of the Lenders and also Auditors of the Company. Your Honou....
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....curity deposit is for business consideration of the Assessee Company hence the interest paid on borrowed funds is fully allowable. It is also submitted that once the security deposit has been given to the Lessor, the Assessee Company is not concerned as to how the Lessor has utilized those funds. It was at the full direction of the partners of the Lessor Firm to utilize the funds and Assessee Company has no right to interfere in that. 52. After considering the above reply, the A.O. was not agreeable that company's own surplus funds were used in the borrowings or that interest-free funds were available with it. Hence he has found that the assessee-company has diverted its funds to its sister concern. He was not agreeable that there was a reduction in lease-rent from 15% to 7.5% of the turnover, as copy of the revised lease agreement was not provided. He has also considered the fact that the assessee-company is running loss and at the same time paying interest to the financial institutions. Therefore, on the sum of 5 crores advanced interest free to its sister concern M/s. Balsamand Horticulture And Animal Husbandry Enterprises, by calculating market interest rate @12% which co....
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....as relied on the exactly diagonally opposite decisions rendered by Hon'ble Madras High Court in the case of CIT vs. Hotel Savera 239 ITR 795 (Md) and of Hon'ble Delhi High Court in the case of CIT vs. Tin Box Co. 260 ITR 637 (Del) and above all on the decision of the jurisdiction (Raj.) High Court decision rendered in assessee's own case on identical facts and reported as DCIT vs. Marudhar Hotels P. Ltd. 245 ITR 138 (Raj.). When a decision of Hon'ble Jurisdictional High Court is available and the ratio of which is just opposite to the decision of Hon'ble P&H High Court, we while sitting in Rajasthan are bound to follow the ratio decidendi of the Hon'ble Rajasthan High Court. Moreover, this ratio has been given in assessee's own case, so it is more the reason that we have to follow the same. The Hon'ble Rajasthan High Court has held in this case as under:- that the question whether deleting the disallowance of interest attributable to interest free advances to the sister concern of the assessee-company was not a substantial question of law for the purpose of section 260A. Moreover, we have noticed that apart from Hon'ble Madras High Court and Ho....