TMI Blog2018 (8) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... show any element of carrying out any business for joint profits. The expenditure on acquisition of land, its improvements were separately incurred by respective owners and sale proceeds were also separately received by respective co-owners, therefore, it is a case of capital gains only and assessee is entitled for exemption under section 54F of the I.T. Act. Order of CIT(A) sustained - Decided against the revenue. - ITA.No.2309/Del./2011 And ITA.No.2310/Del./2011 - - - Dated:- 19-6-2018 - SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER For The Revenue : Shri Ravi Kant Gupta, Sr.DR And Shri Salil Aggarwal For The Assessee : Shri Shailesh Gupta, and Shri Madhur Aggarwal Advocates ORDER PER BHAVNESH SAINI, J.M. Both the Departmental Appeals are directed against the different orders of the Ld. CIT(A)-3, Delhi, Dated 15.02.2011 for A.Y. 2006-2007 in the case of two different assessees on the identical question. 2. We have heard the learned Representatives of both the parties and perused the material on record. Learned Representatives of both the parties mainly argued in the case of assessee Shri Mohinder Puri ITA.No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005, the total land admeasuring 28.815 acres situated in Wazirabad, Sector 53, Gurgaon, was sold to M/s. Parsvnath Developers Ltd., ( PDL ). Out of the subject land, the assessee owned 1.31 acres and M/s. Puri Construction Ltd., ( PCL ), of which, assessee is a Director, owned 10.53 acres. The remaining land was owned by 04 other persons. All the land owners collectively Authorised PCL to enter into and execute the said Agreement and to do all acts, deeds and things in pursuance thereto. The sale proceeds were received in the name of PCL, out of which, the sale consideration received by the assessee in respect of the land owned by him and sold, worked out to ₹ 8,36,90,787/-. After deducting brokerage, cost of acquisition, cost of improvement and indexation, long term capital gain of ₹ 3.40 crores was shown. After claiming exemption of ₹ 3.03 crores under section 54F of the I.T. Act, long term capital gains of ₹ 37,12,316/- was shown in the return of income. The A.O. asked the assessee as to why the income from sale proceeds of the aforesaid land be not treated as business income instead of income from long term capital gains. 4.3 The assessee filed the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of value by realizing a security or is it a gain made in an operation of business in carrying out a scheme for profit-making , (ii) In Janaki Ram Bahadur Ram v. CIT 57 ITR 21 (SC) it was held that the nature of the transaction must be determined on the consideration of all the facts and circumstances which are brought on the record of the Income Tax Authorities. The court observed that a transaction of purchase of land can not be assumed without more to be venture in the nature of trade. The mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade. It was pointed out that the facts that the assessee made a profitable bargain when it purchased the property and that it had a desire to sell the property, if a favourable offer was forthcoming, could not without other circumstances justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade. The following passage from the judgment is illuminating. If for instance transaction is related to the business which is normally carried on by the assessee, though not directly par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Cas 333, 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 In the light of the above observation made by the Hon ble Supreme Court, it is clear that the Hon ble Supreme Court in this case made a distinction between transaction in commercial commodities and transaction on purchase of land distinguishing the transaction on purchase of land from the cases dealing with commercial commodities. In the said decision, the Hon ble Supreme Court has further held that a profit motive in entering into a transaction is not decisive to decide the issue. The Hon ble Supreme Court emphasized that (page 26 of 57 ITR): 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. (iii) In Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253, the Hon ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., 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; the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a design or purpose; the incidents associated with the purchase and resale; the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. 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 drawn an inference that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them, Sales of land, in those circumstances, as we are inclined to think, are no more than a realization of capital or conversion of one form of it into another. * The court took cognizance of final report of the Royal Commission on The Taxation of Profits and Income and observed thus at pages 586 587 : The Commission went on to enquire whether there was any general rule that could advantageously be propounded as a simple test that would separate taxable case from the non-taxable one but concluded that it was not possible in the circumstances to formulate any such rule, and finding, however, that the general line of enquiry which has been favoured by appeal commissioners and encouraged by the courts is to see whether a transaction that is said to have given rise to taxable profit bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If a land owner developed his land, expended money on it, laid roads, converted the land into house sites and with a view to get a better price for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realization of a capital investment or conversion of one form of asset into another Obviously, the surplus in such a case will not be trading or business profit because the transaction is one of realization of asset in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade The case of the assessee can stand on no different footing, as we think, only because it is a company which has among its objects power to trade or traffic in land. There is here no evidence of a venture or adventure. The transaction involved no risk or speculation; nor can it be truly said that it is a plunge in the waters of trade. It is a transaction which any prudent owner of land will engage in and which is, therefore, no more than realization of capital investment, conversion of land into money, not a venture in the nature of trade. Having regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with a view to ensuring that a better price is realized. That the assessee is not a dealer in land, has not been questioned. This was only a single transaction of its kind. Even otherwise the assessee is not carrying on any business as is evident from the return of income. The three principles laid down in para 8 of Circular 4/2007 go in favour of the assessee to determine the nature of transaction. There is no evidence to show that the land was purchased as stock-in-trade, therefore, the condition in Clause (i) of para 8 applies. That it was a solitary transaction shows that the condition in Clause (ii) is also applicable. The condition in Clause (iii) also applies inasmuch as the land was purchased in year 1995-96 and 1996- 97 and the same was sold in the year 2005. The period of holding shows that the assessee was aware that there will be accretion and there will be a good price which can be fetched after holding it for a substantial period. Moreover, the assessee sold the land in order to utilize the increase in purchase of another land, which fact also goes to show that the land was sold as a capital asset. 7.1 We invite kind attention particularly to the judgment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is alleged that the land sold was owned jointly and collectively by PCL, Mr. Mohinder Puri, Mr. Arjun Puri and other related concerns. The aforesaid observations are wrong and incorrect on facts, ft is clearly mentioned in para 1(d) of the agreement dated 4th April, 2005, that each of the land owners is individually the owner of the land and the extent of area owned by each of the land owners was mentioned therein. Therefore, the very premise of the AO that the lands were owned jointly and collectively is incorrect. The fact of the matter is that lands were owned individually by the land owners and this fact is also evident from the mention of the fact that land was purchased by each landowner separately for which each landowner got a separate registration executed, the details of which are given in the agreement dated 4th April, 2005 itself. (ii) In para 3 the Assessing Officer has mentioned that the sale of land is between PCL and M/s. Parsvnath Developers Ltd. (PDL). Though there is a single agreement but it is a matter of fact, which is self evident from the record, that each land owner has been separately mentioned, giving his separate holding and each landowner has si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll owner of the land purchased by a separate deed of registration and he held the same as investment till it was sold. The Assessing Officer has been influenced by the fact that there being a single sale deed for the lands having been executed with PDL, it was a case of joint collaboration between assessee and PCL. This proposition does not emerge from the agreement. Each landowner being a separate and distinct owner it does not make the sale as having been made in joint collaboration. The Assessing Officer has failed to appreciate that the assessee owned only a small portion of the land i.e. 1,31 acres at Village Wazirabad, Sector 53, Gurgaon. This land though separate was contiguous to the larger portion of the land owned by PCL. In order to obtain a better price it was decided to enter into a single sale deed, because the purchaser was same. This intention of earning a better price cannot be equated to carrying on of the business. (v) The reason given in para 5.4 again is not relevant. No doubt the sale proceeds were received in a common account maintained by PCL. This fact, by itself cannot lead to an inference that there was a joint venture. It has not been appreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the case of Kasturi Estates Pvt. Ltd. (supra) where even the expenditure incurred for laying roads, corporation survey, centage, filling up, parceling into plots and other matter was not held on activity of business but expenditure for realizing better sale price of the capital asset. (ix) The observations in para 5.9 are incomprehensible and in any case do not advance the case of the A.O. (x) The observations in para 5.10 are academic and subjective and not based on any material in support. (xi) The observations in para 5.11 are again subjective remarks. The fact that the land was purchased by a single purchaser and who was a builder ipso facto does not make the transaction as an adventure in the nature of trade in so far as the assessee was concerned. The assessee had a small part of land compared to the land owned by PCL. When PCL, who admittedly is a builder found a purchaser, the assessee got an opportunity to offer his land with a view to obtaining a better price. This did not make the assessee as a co-adventurer. 9. For the reasons stated above it is submitted that the income may kindly be accepted under the head capital gains and a relief u/s 54F ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany engaged in the business of real estate and construction as promoters, developers and builders. The purpose for acquiring the impugned land from PCL et al by PDL was for construction of a real estate project subsequently called Exotica Project of PDL. In the precedent cases, where land purchased and subsequently developed, with the object of making it more readily saleable, was sold at a profit, the intention of the assessee was treated to be not to hold the land as an investment, but as a trading asset in Cavzer, Irvine and Co. Ltd. v. Commissioners of Inland Revenue as cited in the case of G.V. Naidu (supra). 7.1 There is no quarrel on the fact that both PDL and PCL were engaged in the business of real estate. The profit from sale of land by PCL to PDL has duly been shown as business income, But it is wholly inconceivable to presume that the sale of land by the assessee to PDL was an adventure in the nature of trade. In this regard the citation of the judgment in Cayzer, Irvine Co. Ltd. v. Commissioner of Inland Revenue (1942) 24 Tax Cases, 491 is not relevant in so far as the assessee is concerned. We reproduce what was said about this case at page 609. Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Reference was made to the judgment in case of Kasturi Estates Pvt. Ltd. 62 ITR 578 (Mad) where the judgment of Naidu s case was considered. The incurring of these expenditure did not turn the holding of land for a period of 10 years from investment to stock-in-trade. 8. Without burdening our submissions we conclude by pointing out the fact that Naidu s case was decidedly entirely on its own facts, which facts were so transparent and self evident that no other conclusion could be drawn. All the facts pointed out vividly that it was a case of adventure in the nature of trade. Instead of paraphrasing we consider it appropriate to refer to two pages from the judgment which may be allowed to speak for themselves. The first passage gives the facts and the second passage the conclusion. The first passage is at pages 600 601 which inter alia reads as under : We may at this stage briefly indicate the material facts and circumstance found by the Tribunal and the inference drawn by it in regard to the character of the transaction in question. The appellant purchased the four plots under four different sale deeds. The first purchase was for ₹ 521 and it covered a piece of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mills to purchase the adjoining plots for the purpose of building tenements for its employees. The Tribunal was not impressed even by this plea; and so it ultimately held that the plots had been purchased by the appellant wholly and solely with the idea of selling them at profit to the mills. The Tribunal thought that since the appellant was the managing agent of the mills it was in a position to influence the decision of the mills to purchase the properties from it and that was the sole basis for its initial purchase of the plots. On these findings the Tribunal reached the conclusion that the sum of ₹ 43,887 was not a capital accretion but was a gain made in the adventure in the nature of business in carrying out the scheme of profit-making. The appellant contends that, on the facts and circumstances found in the case, it is erroneous in law to hold that the transaction in question is an adventure in the nature of trade. The conclusion is at pages 622 and 624 which inter alia reads as under: What then are the relevant facts in the present case? The property purchased and resold is land and it must be conceded in favour of the appellant that land is generally t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it was after the appellant had consolidated its holding that at a convenient time it sold the lands to the Janardana Mills in two lots. When the Tribunal found that, as the managing agent of the mills, the appellant was in a position to influence the mills to purchase its properties its view cannot be challenged as unreasonable. If the property had been purchased by the appellant as a matter of investment it would have tried either to cultivate the land, or to build on it; but the appellant did neither and just allowed the property to remain unutilized except for the net rent of ₹ 80 per annum which it received from the house on one of the plots The reason given by the appellant for the purchase of the properties by the mills has been rejected by the Tribunal; and so when the mills purchased the properties it is not shown that the sale was occasioned by any special necessity at the time. In the circumstances of the case the Tribunal was obviously right in inferring that the appellant knew that it would be able to sell the lands to the mills whenever it thought it profitable so to do. Thus the appellant purchased the four plots during two years with the sole intention to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase was one which lacked the element of trading. It was not a case where the assessee can be said to have plunged into the water of trade. It will be wholly inappropriate to presume that assessee being the director of a company dealing in real estate would necessarily be taken to be engaged in business when he purchased some land. There being no material to show that the first step of purchase of land showed that it was taken as, or in the course of a trading transaction the profit cannot be taken as business income. 4.5 The assessee also relied upon the following decisions: (i) CIT v. Sohan Khan Mohan Khan [2008] 304 ITR 194 (Raj,). In this case the assessee purchased a large extent of land. The land was under the cloud of sealing laws and after it got clear therefrom, assessee prepared a site plan showing the land to be divided into different plots and the plots were accordingly sold. The AO held the profit from sale as transaction in the nature of trade on the ground that the land surrounding the original land was owned by near relatives and family members and the purchasers were impressed by the fact that the land belong to the same family and was being planned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure pre-supposes two or more persons undertaking to combine their property or labour in conduct of a particular line of trade or a general business for joint profit. It was explained that no evidence has been led by the A.O. to show that assessee join hands with other parties to sold the subject land and there was a combination between such persons to carry-out business for joint profits. The very fact that each co-owner separately purchases their lands but only combined for the purpose of sale, does not show any element of carrying out any business for joint profits. The expenditure on acquisition of land, its improvements were separately incurred by respective owners and sale proceeds were also separately received by respective co-owners, therefore, it is a case of capital gains only and assessee is entitled for exemption under section 54F of the I.T. Act. 5. The Ld. CIT (A), considering the explanation of assessee in the light of material on record held that sale of land was sale of capital asset and the profit was in the nature of capital gain. The A.O. was directed to compute the capital gain and also allow benefit of deduction under section 54F of the I.T. Act, 1961. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olidated its holding, that at a convenient time the land was sold. The appellant was found to be managing agent of the mill, who was in a position to influence the mill to purchase its properties, which cannot be said to be unreasonable. Thus, in view of the principles propounded therein, and on the facts of that case as considered, it is clear, that in order to arrive at a conclusion, as to whether it is to be taxed as capital gain or the transaction is to be treated to be an adventure in the nature of trade , things cannot be put in any strait jacket formula, and it was dependent upon the facts and circumstances of each case, to be decided on the basis of relevant consideration. (ii) One of the reasons given by the Assessing Officer is that the appellant entered into a joint venture with M/s. PCL and other co-owners for the sale of the subject land admeasuring 23.815 acres in Sector 53, Gurgaon and even though it was a solitary transaction for the appellant, essential features of trade are present. It is stated that the subject land was purchased together in collaboration by PCL and the appellant and since PCL has shown the sale of land as business income, it is not underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a matter of record that the appellant has never been a dealer in land and the present transaction was a solitary transaction of the sale after about 10 years of acquisition, In CIT v. Sohan Khan Mohan Khan (supra) original land was surrounded by many lands of near relatives and family members of the assessee. If the plots would have been carved out from assessee s land alone they could not have been sold for want of network of roads available upto the adjoining lands only and that at some distance there was Government road measuring 200 feet. The land owners had planned the sale of plots together. The purchasers were impressed by the fact that all the land belonged to the same family and was being planned and sold together. All these facts were duly considered by the Hon ble Court and it was held that they did not render the transaction as adventure in the nature of trade. Some of these features also exist in the present case. Since there was a single buyer who wanted to develop the entire tract of land belonging to the various co-owners, it was though prudent to have one single sale deed for the sale of the entire land. In view of the aforesaid judgment of the Rajasthan Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of land was taken in the course of a trading transaction. The land was kept well over 10 years, there is nothing on record to show that in his individual capacity the appellant was ever involved in any activity of purchase/development of land and sale thereof. What was realized on the sale of land was accretion to the capital. It is not a case where the appellant can be set to have plunged into the waters of trade. (v) The following facts also go to show that it was a case of sale of capital assets, giving rise to capital gains. * There is nothing on record to show that there was a motive right from the time of acquisition of land to plunge in the waters of trade. * It was a case of a solitary transaction of acquisition and sale of land. * The length and period of ownership from 1995-97 to 2005 is a strong pointer to the fact that land was purchased by way of investment. * No supplementary work was done in connection with the property of substantial magnitude. The expenditure on land development of ₹ 77,04,873/- was only 9% of the sale price of ₹ 8.37 crores. * No organized effort was undertaken to attract purchasers. * The circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (A) at page-26 of the order. Learned Counsel for the Assessee submitted that the land in question was held by 06 persons, out of which, 03 are company and 03 are individuals. The individuals are the assessees, Shri Mohinder Puri and Shri Arjun Puri and Ms. Gurleen Manchanda. In the case of co-owner of the land Ms. Gurleen Manchanda, the A.O. passed the assessment order under section 143(3) dated 12.12.2008 for A.Y. 2006-2007 under reference, in which, the co-owner has declared the long term capital gains on account of sale of the same land and claimed exemption under section 54F of the I.T. Act. The A.O. after due enquiry, accepted the claim of assessee of capital gains and also allowed exemption under section 54F of the I.T. Act. He has submitted that the companies are in the trade of land. However, the assessee is an individual and assessed in the capacity as individual. PB-5 to 9 are the acknowledgment of filing of the return of income along with computation of income in the case of assessee for preceding A.Ys. 2004-2005 and 2005-2006 to show that assessee has declared salary income and income from other sources, which have been accepted by the Department. Therefore, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in capital asset. Thus, the intention of the assessee at the time of purchase of property was to make investment in capital asset as an investor. The assessee kept the same as an investment and has never taken into stock-in-trade. No borrowed funds have been used or interest paid on any amount for the purpose of investment in the land. There is no frequency of transaction carried out by the assessee. The assessee made re-investment in land for claiming exemption under section 54F of the I.T. Act. The assessee made investment in capital asset expecting appreciation-in-value in future. The assessee in his individual capacity was not involved in any trade or business to deal in lands in earlier years. The assessee has income from salary and income from other sources, which have been declared in the returns of income for preceding assessment years, which have been accepted by the Department. Therefore, assessee was not regular in trade for sale of the property. The assessee was a Director in PCL which is a different legal entity. Merely because PCL held the land as stock-in-trade, does not prove that assessee also held the property as stock-in-trade. The assessee did not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differently who is also an individual and claimed the investment in property as an investor. Therefore, case of the assessee cannot be compared with other companies i.e. PCL and others who were holding the properties as stock-in-trade. The decisions relied upon by the Ld. D.R. in the case of G. Venkataswami Naidu Co. (supra), do not support the case of the Revenue. Considering the totality of the facts and circumstances of the case in the light of the above discussion and in the light of finding of fact arrived by the Ld. CIT (A), we do not find any infirmity in the order of the Ld. CIT (A) in holding that sale of land was sale of capital asset and the profit was in the nature of capital gain. The claim of assessee for exemption under section 54F is, therefore, been rightly allowed in favour of the assessee. Both these grounds of appeals of Revenue are dismissed. 10. On Ground No.3, the Revenue challenged the order of the Ld. CIT (A) in deleting the addition of ₹ 77,04,873/- on account of bogus land development expenditure. 11. The facts in brief are that, land development expenses were incurred by PCL for entire subject land. The expenses of ₹ 77,04,873/- were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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