TMI Blog2013 (2) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wns the property commonly known as Umaid Bhawan Palace, Jodhpur and at the foothill of the Hotel property some open land was available, which was decided to be sold. For this purpose an agreement was entered with M/s. Ess Gee 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any from the very beginning. The A.O. has also disallowed interest u/s. 36(iii) amounting to ₹ 60 lakhs being deemed amount of interest on security deposit of ₹ 5 crores and ₹ 49,79,418/- for advances given to Shri Gaj Singh Ji, Jodhpur, which are treated as advances out of borrowed funds and not from its own funds. The facts in all other years are almost identical except for the figure of income computed or the amount of disallowance. These advances have been 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 dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this company, Maharaja Gaj Singhji has 90.38% shares. At the time of dissolution of the firm, the value of the property was adopted at ₹ 57,20,000, including the value of Palace building, furniture and fixtures and land admeasuring 13,31,778 sq. yds., out of which the Palace building occupied land to the extent of 22,445 sq. yds. only. Thereafter, the appellant is engaged in running a hotel in Umaid Bhawan Palace. As a result of declining business which resulted in heavy losses and with a view to raise 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 Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oit the same for use in the business or to make profit by buying and selling? b) Classification in the financial statements - whether classified as capital asset/ investment or as stock-in-trade? c) The period for which asset is held prior to sale. 13. Our attention was also invited towards various decisions. We have examined them and we discuss the same as below: In the case of G. Venkateswami Naidu and Co. vs. CIT: 35 ITR 594 (SC), the Supreme Court held as under: Where the question is whether a transaction 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of trade. (emphasis supplied) 14. The apex Court in the case of Sutlej Cotton Mills Supply Agency Ltd: 100 ITR 706 (SC) has observed as follows: ... 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 under changed circumstances would only be a realization of capital and would not stamp the transaction with a business character. Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investor realising his holding: but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention of resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though 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 quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the purchase: Commissioners of Inland Revenue v. Reinhold [1953] 34 TC 389 (C Sess): a person carrying on business in various lines, including an engineering works, purchasing land which was under requisition by the Government, negotiating sale thereof before the land was derequisitioned, and selling it after the land was released: Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) and a syndicate formed to acquire an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been entered into with the intention of earning a profit. Though that is not a conclusive test it is certainly an essential test before such a conclusion could be drawn, but such a case is quite different from the case of a person purchasing the property with the dominant intention of using it himself or enjoying it himself but, at the same time, expecting at some future date, if it goes up in value, he may take advantage of the rise in the price. All the circumstances referred to by the Tribunal in coming to the conclusion that the assessee had entered into an adventure in the nature 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 328 (SC) CIT vs. Simson General Finance Co. Ltd.: 230 ITR 222 (Mad) CIT vs. Shreyas Chinu Bhai: 237 ITR 358 (Guj) CIT vs. Hansalya Properties: 236 ITR 660 (Del) Ashok Kumar Goyal vs. ITSC: 274 ITR 264 (All) CIT vs. R. V. Gupta: 258 ITR 261 (Del) ITO vs. Omkarmal Rambilas Ginning and Pressing Factory: (2011) 44 SOT 544 (Hyd) 21. The underlying principle that emerges from the aforesaid decisions is that the relevant/ crucial factor in determining the nature of the gain arising on transfer of an asset is the intention at the time of purchase. If the 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention at the time of purchase of a house is important. The pertinent observations of the Court are reproduced hereunder: In the present case, while holding that the assessee entering into an agreement with the builder to get the multi-storeyed residential units constructed on the plot of land where a single-storeved house, occupied by the assessee since 1973. existed up to 1989. did not constitute an adventure in the nature of trade, the Tribunal has observed that the entire exercise undertaken by the assessee was for realisation of a capital asset; the intention at the time of purchase of the house; his contemporaneous 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as under: Considering the aforesaid facts and circumstances of the case, we are also of the view that the selling of own land after plotting it out in order to secure better price, is not an adventure in the nature of trade or business. The word business has been defined under section 2(13) of the Income tax Act, 1961, which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. An isolated transaction or activity can also be part of business but to consider the question of business, there must be regular activity of purchasing and selling. In this case, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. On the other hand, the Department took the view that the assessee could not treat this expenditure as capital expenditure. The Tribunal, while deciding on favor of the assessee, observed as under: Here, in the present case the expenditure were made for the purpose of development and for the purpose of payment of interest on the borrowings from the various persons. Therefore, all the expenditures are in nature of capital in nature. 31. Still further the Jodhpur Bench of the Tribunal in the case of ACIT vs. Shiv Deep Industries in ITA No. 485/JU/2008 has taken a similar view. In that case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly speak about the given facts and the circumstances of a given case to ascertain as to whether any asset which is held by the assessee is to be treated as an 'investment' or as a 'stock in trade'. But the judicial decisions verily lay down some specific situations or conditions which exist in a given case they can be determinant factors to answer if the 'sale-proceed' of an asset has to be considered as a business receipt or a capital receipt. After analyzing catena of judicial pronouncements in detail, we are able to cull out the following factors, which if found is exist in a given 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion come into the picture. A person may purchase a piece of art, hold it for some time and if a profitable offer is received sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the transaction being in the nature of trade The presence of all these relevant factors may help the court to draw an inference that a transaction is in the nature of trade; but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive 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 natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; e) the appellant company in partnership (50% share) is also involved in construction of villas on the plotted land. The entire development of the plotted area, and construction of villas, is one integrated transaction, in the form of composite business activity being carried on by the appellant company. 37. But we are not in agreement with the above submissions because the decision of the Hon'ble Bombay High Court in the case of K.H. Mody vs. unknown reported in [1940] 8 ITR 179, Bombay, on which ld. CIT(DR) has relied was rendered entirely on different facts. In that case the ld. CIT had already given a finding of fact that the assessee was engaged 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the CIT DR do not deal with the risk associated with the project. Clause 13, for instance, points out that in case of any unsold plots remaining, the same shall be apportioned between the appellant as the land owner and the developer. The said clause further provides a formula for compensation between the parties inter se for the value of land owned by the appellant and the cost of development incurred by the developer. A reading of the said clause nowhere indicates that any risks in the project vest in the appellant. 43. Clauses 21 and 22 of the Development Agreement deal with the remedy available to the appellant, in case the developer was to commit breach of the terms 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd making the land available, the appellant has no role /responsibility under the said Development Agreement. It seems as more probable and plausible that the Development Agreement has been entered into by the appellant to earn best/maximum price for its land-rather than selling the surplus on developed land on an outright, as is where is basis, which would have fetched much lower and unremunerative price. 47. The ld. CIT DR has contended that accounting treatment in the books of account is conclusive of the issue. We agree with ld. CIT (DR) to that extent. However the accounting treatment, though not conclusive, but when seen in conjunction with surrounding circumstances, it because 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alsamand Horticulture and Animal Husbandry Enterprises where partnership share is 95% along with 5% share of HHRM Krishna Kumari, her mother. iii) The assessee has advanced an amount of ₹ 5 crores to M/s. Balsamand Horiculture and Animal Husbandry Enterprises towards lease rent agreement made with M/s. Balsamand Horticulture and Animal Husbandry Enterprises. iv) M/s. Balsamand Horticulture and Animal Husbandry Enterprises had further advanced ₹ 5 crore to Jodhan Investment Finance Corporation Pvt. Ltd. which has 4% share holding in Marudhar Hotels Pvt. Ltd. and is group company of the same group. v) This amount has enduring nature of generating at least interest 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amount of security deposit has not been given out of the borrowed funds hence no part of interest paid to the Banks and Financial Institutions, loan of which have been utilized for up-gradation and renovation of the properties, could be disallowed as per the provisions of the law nor any addition or disallowance could be made out of the interest paid unless it is proved that the amount interest free loan has been advanced out of the borrowed funds and as submitted above the security deposit has been given out of own funds and the same was given for business consideration. As mentioned above that the security deposit has been made out of own funds and not from borrowed funds; the security 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 37,32 crores and still it has chosen to pay interest of ₹ 4,72,96,659/- in the A.Y. 2007-08, therefore, it has clearly diverted interest bearing funds to its sister concern. He has, thus, justified the addition of ₹ 60 lacs. 56. We have carefully circumspected the entire records in the light of the facts of the given case. In fact ld. CIT(A) has placed reliance on the decision of the case in CIT vs. Abhishek Industries Ltd. 286 ITR 1 of Hon'ble P H High Court. In that case it has been held that the burden to prove that the advance was not out of interest-bearing funds and that there is business nexus in advancing interest free loans to sister concern is on the assessee. The ld. AR has 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 Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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