Ashok Kumar Chouta Vs DCIT (ITAT Bangalore)
The issue under consideration is whether land sold by assessee engaged in property development taxable as capital gains or business income?
ITAT states that the assessee has converted the business asset into Capital asset and accordingly sold the same as Capital asset only. ITAT notice that the assessee has not brought any material to substantiate the above said contentions. The assessee has held the property for about 3 years and 2 months. The assessee has not explained as to when he has decided to convert the business asset into Capital asset. Without explaining the date-wise sequence of events which persuaded the assessee to abandon the project, it would be difficult to appreciate and accept the explanations of the assessee. Further, upon abandoning of project, the land can also continue to be held as business asset and sold as business asset. ITAT notice that the assessing officer has pointed out that the assessee has sold another land located at Kodical during the AY 2007-08 and disclosed the profit as his business income. The assessee as well as the Ld CIT(A) has placed reliance on the statement given during the course of search. In our considered view, the statement given by the assessee u/s 132(4) of the Act and declaration/non-declaration of the land for wealth tax purposes are collateral facts and hence they cannot be considered as deciding factors in order to decide the character of land. The Ld CIT(A) has also observed that the amount paid to tenants has been capitalized and not claimed as deduction In case of execution of project of construction of multistoried apartment, it is the trade practice to bear the rent paid by tenants who are going to be allotted flats in the proposed building and further, those expenses are usually claimed against the revenue generated from the said project only. Hence the question of claiming the rent so paid as deduction against other income of the assessee does not arise, since they are project specific expenses. In view of the foregoing discussions, we are of the view that the various reasons given by Ld CIT(A) to treat the land as capital asset would fail. On the contrary, uncontroverted fact is that the intention of the assessee, at the time of purchase of the land, was to hold the same as business asset only, which is evident from the purpose for which the land was purchased. ITAT have noticed that there is no material to show that the assessee has really converted the business asset into capital asset. Accordingly, ITAT are of the view that the character of the impugned land is to be considered as “business asset” only and consequently, the profit arising on its sale is required to be assessed as business income only. Accordingly, ITAT set aside the order passed by Ld CIT(A) on this point.
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals are directed against the order dated 29-082011 passed by Ld CIT(A)-6, Bangalore and they relate to the assessment year 2009-10.
2. The assessee is in appeal challenging the decision rendered by Ld CIT(A) on the following issues:-
(a) Determination of Sale consideration relating to Kadri Kamble Property.
(b) Disallowance of loss arising from Income from House Property.
(c) Addition relating to unaccounted investment in the flats purchased in West Wind Project.
At the time of hearing, the Ld A.R did not press the issue no.2 cited above. The other grounds urged by the assessee are either general or consequential. Hence only two issues survive in the appeal of the assessee.
3. The revenue is in appeal challenging the decision rendered by Ld CIT(A) on the following issues:-
(a) Whether the Ld CIT(A) was justified in directing the AO to assess the profit arising on sale of Kadri Kamble property as Income from Capital gains as against the decision of the AO to assess the same as Income from Business.
(b) Whether the Ld CIT(A) was justified in directing the AO to allow deduction u/s 54F of the Act.
(c) Whether the Ld CIT(A) was justified in reducing the addition relating to unaccounted investment in the flats purchased in West Wind Project.
All the issues urged by the revenue is interconnected with the issues urged by the assessee.
4. The facts relating to the above said additions are discussed in brief. The assessee is engaged in the business of property development. He is the proprietor of M/s Classic Promoters and Developers. The revenue carried out search and seizure operation u/s 132 of the Act on 13.02.2009 in the hands of the assessee. Subsequently, the assessee filed return of income for the year under consideration (AY 2009-10) declaring a total income of Rs.64,14,210/-. The AO completed the assessment determining the total income at Rs.4,07,03,080/- by making various additions. The Ld CIT(A) granted partial relief to the assessee. Hence both the parties are in appeal before us challenging the decision of Ld CIT(A) rendered on the above said issues.
5. The first issue relates to the assessment of profit arising on sale of Kadri Kamble land. The assessee had purchased this land having an extent of 42 cents in Kadri Kamble, Mangalore during the financial year 2005-06. After the search operations, the assessee has filed a revised balance sheet, wherein the cost of purchase of above land was shown at Rs.30,04,000/-. According to the assessee, this land was occupied by certain tenants and he has spent money to vacate them. The assessee has sold the land to a person named Mrs. A latha, w/o Sri K Ashoka residing in Bangalore during the year under consideration. Till the date of sale, the cost of land (including payment made to tenants) was shown at Rs.49,54,000/-.
6. The assessee has sold this land to Smt. A Latha through a sale deed dated 03.12.2008 for a consideration of Rs.1,07,00,000/-. However, the assessee did not declare the profit/capital gain arising on sale of this land in the return of income filed by him for AY 2009-10. However, a note was appended to the Computation of income stating therein under the head “Capital gains” that “gain on sale of property could not be computed due to inavailability of information”.
7. During the course of search, the search officials found both the Sale agreement and sale deed relating to the above said land. The assessee had entered into a Sale Agreement with Smt. A Latha on 07-07-2008, wherein the sale consideration was shown at Rs.3,55,00,000/-. However, the sale deed was seen registered on 03-12-2008 for a consideration of Rs.1,07,00,000/- only. During the course of search, a statement was taken from the assessee u/s 132(4) of the Act. In response to the question no.5, the assessee admitted that the land was agreed to be sold for a sum of Rs.3,55,00,000/-. The relevant question and answer are extracted below, for the sake of convenience:-
“Q No.5 : You had sold a land situated at Kadri Kambla Road, Mangalore to some Bangalore Party. Please tell me what is the cost of the acquisition of the land? When was it acquired? When did you sell the land? Who is the buyer? And what is the total sale consideration received?
Ans:- The land was purchased during the financial year 200506. It consists of 42 cents. I do not remember the consideration paid to the vendors. However, the purchase of this property is reflected in my balance sheet. This property is now sold to one Mrs. A Latha, w/o K Ashoka residing at SB
242, Vijaya Enclave, Bilhakahalli, SRS Nagar, Bannerghatta Road, Bangalore-76 during December, 2008. The total agreed consideration was Rs.3,55,00,000/-. I purchased the land from the land owners in the year 2006-07 with a understanding that I will settle the tenants demands. I entered into agreement with the tenants and offered them 8 flats out of the 24 flats that was proposed to be constructed in this land. I got the tenants vacated and they are living in rented premises. I am paying the rent for their residences now. In the meanwhile, I entered into agreement with the Bangalore Party for sale of the land. As per the agreement with the tenants, I was to complete the construction of the flat within a period of about 2 years. Since the construction was not started the tenants have approached the Court of Law and the matter is now pending in the Court. Now Bangalore Party who purchased the land has asked me to settle the issues with the tenants and handover the clear titles to them, failing which they have now stated that they will not pay the difference between the agreement value and the registered value. The buyers have issued a legal notice to me in this regard. The registered sale deed is yet to be handed over the buyers. The registered sale deed is kept in safe custody with Escrow, Sri Udayaprakash Muliya, Advocate. I will verify the liability to capital gains tax on this sale and come back to you shortly.”
8. The assessing officer sought explanations from the assessee with regard to the difference in sale consideration as mentioned in the Sale Agreement and Sale deed. It was explained that the buyer of the property came to know of the legal problems surrounding the property and hence the sale consideration was finally agreed at Rs.1.07 crores as mentioned in the Sale deed. The assessee further submitted that he did not receive a sum of Rs.45 lakhs out of above said sale consideration also. The assessee accordingly submitted that the actual sale consideration should be taken as Rs.62 lakhs (Rs.107 (-) Rs.45) only for the purpose of computing capital gains. The assessee further submitted that he has invested a sum of Rs.4.00 crores in purchase of another residential property and hence deduction u/s 54F of the Act should be given against the long term capital gain arising on sale of Kadri Kamble property.
9. The AO did not accept the contentions put forth by the assessee. He noticed that the sale agreement as well as the sale deed did not mention anything about the tenancy rights in the land, vacating of tenants, settling the rights of tenants etc. As per sale deed, the possession has already been given to the buyer of the property. Accordingly, the AO took the view that the sale consideration should be taken as Rs.3,55,00,000/-only as mentioned in the Sale Agreement.
10. The AO also took the view that the profit arising on sale of the above said land is assessable as Income from business for the following reasons:-
(a) The assessee is engaged in the business of property development.
(b) The above said land was purchased for the purpose of construction of flats, which is a business activity of the assessee. He also entered into an agreement with the sellers of land to allot/sell flats in the proposed residential condominium.
(c) This activity is in the nature of adventure in the nature of trade.
(d) The assessee has shown this property also along with other business assets under the head “investments” in the Balance Sheet. Other lands shown under this head is treated as business assets by the assessee.
(e) The assessee has not filed any Wealth tax returns declaring the above said land as capital asset taxable under the Wealth tax Act. Even if the assessee files wealth tax return subsequently, its character as business asset will not change.
(f) The assessee has sold another land located at Kodical during the AY 2007-08 and disclosed the profit arising therefrom as his business income.
11. The assessee submitted before the AO that he purchased the impugned land for business purposes only. Since there was change in licensing policy prescribed by the City Corporation, it came to know that the built-up area originally planned could not be constructed. Hence the assessee converted his business asset into capital asset and sold the same after three years. The AO rejected the said contentions of the assessee by observing that the assessee is coming out with new explanation with the intention of avoiding the payment of tax on the profit earned from sale of this property. Accordingly, the AO computed the business profit on sale of this land as under:-
