Medravathi Agro Farms Pvt. Ltd. Vs ACIT (ITAT Hyderabad)
It is observed that the assessee company as well as other thirteen land owning companies were incorporated with their main object to carry on the agricultural activities and there is no dispute about the same. In order to pursue this main objects, these companies purchased agricultural lands in the year 2002 and the lands so purchased were treated by them in the books of account as capital asset upto 30 December, 2005 when the said lands were transferred to a developer company, M/s. Maytas Properties Ltd. by way of development agreement. Although there was no agricultural activities actually carried on by the assessee as well as other thirteen land owning companies till the date of development agreement, expenditure was incurred by them for leveling of the land and laying roads, etc. There is, however, nothing brought on record to show that there was any intention on the part of the assessee company to carry on the business of real estate development by using the lands acquired by them as stock in trade. On the other hand, the primary evidence in the form of objects of the assessee company, entries in the books of account etc. was clearly in favour of the assessee to show that the lands were acquired and held by them up to the date of development agreement as capital assets and there is nothing to dislodge this position emerging from the primary evidence.
The Assessing Officer as well as the learned CIT(A) have relied on various events to arrive at a conclusion that the intention of the assessee companies right from the beginning was to acquire and hold the lands as stock in trade for the purpose of carrying on the business of real estate development. However, most of the events relied upon by the authorities below are subsequent events occurring after the date of development agreement and the same in our opinion, cannot be relied upon to come to the conclusion that the intention of the assessee company right from the beginning was to purchase the land as stock in trade for carrying on real estate development business.
In order to ascertain whether it is a case of capital asset or stock in trade, the intention at the time of acquisition thereof is material and the subsequent events cannot change the nature of the asset, which is to be determined on the basis of the intention of the assessee at the time of acquisition. In the present case, the intention of the assessee company as gathered from the main object for which it was established and the accounting treatment given in the books of account was to acquire the lands as capital assets, in order to carry on agricultural operations and the subsequent events mostly occurring after the date of development agreement, in our opinion, cannot change the nature and character of the land into stock in trade which was otherwise acquired and held by the assessee company at least upto the date of development agreement as capital asset. Moreover, the land after its acquisition and before entering into development agreement was declared by the assessee company in its Wealth Tax returns as capital asset and the same was accepted by the Department. It is also worthwhile to note here that the developer company was incorporated only in the year 2005, while all the land-owning companies were not only incorporated in the year 2002 even the lands in question were acquired in the year 2002. It therefore, cannot be said that the intention of the group as a whole right from the beginning was to acquire the lands for property development and such allegation made by the Assessing Officer is was any basis. As such, considering all the facts of the case as borne out from the record, we are of the view that the lands in question were acquired and held by the assessee upto to the date of development agreement as capital asset and the profits arising from the transfer thereof as a result of development agreement entered into with the developer company is chargeable to tax as capital gain and not business income.
FULL TEXT OF THE ITAT JUDGEMENT
These forty appeals filed in the case of fourteen assessees for two years i.e. 2008-09 and 2009-10 involve common issues and the same, therefore, have been heard together and are being disposed of by a single composite order for the sake of convenience.
2. The main common issue involved in these appeals relates to the determination of the head of income under which profits arising to the assessee companies from the transfer of their lands as per the development agreements and from the sale of flats/bungalows allotted by the developer in lieu of or as consideration for transfer of land is chargeable to tax. The remaining common issues involved in these appeals are incidental to the main issue and they mainly relate to the determination of the quantum of income that is chargeable to tax in the hands of the assessee once the head of income is determined/decided. Since the issues involved in the case of all the fourteen assessee’s as well as the facts relevant thereto are materially similar, we take the case of M/s. Goman Agro Farms Pvt. Ltd. for the purpose of narrating the facts in detail and considering and deciding the issues involved in the light thereof.
3. The assessee M/s. Goman Agro Farms Pvt. Ltd. is a company. It acquired lands in two pieces to the extent of seven acres in the financial year 2002-03 at Survey No.194 Bachupalli Village, Ranga Reddy District. Thereafter, it incurred some expenditure on fencing, laying of roads, etc. in respect of the said land during the financial years 2002-03 to 2005-06. On 30.12.2005, the assessee company and thirteen other companies who had also owned lands adjacent to the land of the assessee company, entered into development agreement with M/s. Maytas Properties P. Ltd. As per the said development agreement, the developer agreed to construct apartments and bungalows on the land owned by all the fourteen companies and to give/allot 27% of the area of such apartments and bungalows to the land owner companies. Accordingly, the land of around 98 acres was pooled up by the developer from all the fourteen companies and flats and bungalows were constructed. The assessee company in lieu of transfer of its land thus was given certain built up area in the form of flats/bungalows which were subsequently sold to various buyers. For the flats and bungalows so sold during the year under consideration i.e. 2008-09, the assessee company received total sale proceeds of Rs.7,90,82,027. For the purpose of taxation, these sale proceeds/receipts were bifurcated by the assessee company into proceeds received by it in the form of built up area ( ich it received on the sale of land) taking the cost of construction as the basis; and further proceeds received by it on the sale of such constructed area to various buyers. The first transaction was considered by the assessee company as transfer of first capital asset i.e. land, while the subsequent transaction was idered as transfer of second capital asset, i.e. built up area. Since the land was undisputedly held by the assessee company for a period of more than 36 months, it was treated as long term capital asset and profit arising from such asset was offered to tax as long term capital gain. As the built up area was held by the assessee for a period of less than 36 months, the same was treated as short term capital asset and profit arising from the transfer or sale thereof was offered to tax as short term capital gain. Accordingly, a sum of Rs.4,86,86,431 worked out by deducting the indexed cost of acquisition from the sale proceeds was offered as long term capital gain and a sum of Rs.2,78,78,141 was offered as short term capital gain. For calculating the short term capital gain, the cost of acquisition of built up area was taken as ‘nil’ by the assessee company, as the same was received in lieu of the sale of land owned by it.
4. The issue relating to the assessee’s claim of long term capital gains and the short capital gains arising from the transfer of land and sale of built up area respectively was examined by the Assessing Officer during the course of assessment proceedings in the light of the relevant factual background. On such examination, he recorded his findings/observations in detail as under-
“5.1 The family members of Sri B Ramalinga Raju entered into real estate business In a very planned, systematic manner by floating the companies and acquisition of lands in the vicinity indicates that. As part of it, various companies under their own family members management were floated, lands were acquired In the vicinity. The dates of acquisition of lands in the same survey numbers around the same time period clearly indicates that, fourteen companies acquired land in such a way that, if pooled they will form a single piece of continuous land that can be used on a future date without any hindrances. (The topography of the site with survey numbers is enclosed with this assessment order as annexure} The above also Indicates that at the time of purchase of lands itself, the clear intention of companies and the individuals involved in it was to develop them on future date and sell them after making profit.
5.2 All the land owning companies pooled up their land facilitating a joint mega venture by a common agreement with developer i.e., M/s. Maytas Properties Pvt Ltd. and planned their activities in such a manner that they will take maximum advantage of their possession.
5.3 As holding company M/s Maytas, Properties Ltd. completely acquired the control on the all the land owning companies by making them as its subsidiary companies and controlled their affairs in total. All this is a systematic planning and execution with a ultimate motive of earning profits on a later date. The companies were floated with an idea of land acquisition on various names and once an agreement was reached, mega project was launched all these companies went in to the control of the developer facilitating raising of the loans from the bank and other operational conveniences. Though all these transactions were carried on different entities names, ultimately all it is nothing .but planned and systematically executed activity by few closely related individuals with clear motive of earning the profit.
5.4 The assessee-company systematically followed the method of· accepted revenue recognition i.e., Project Completion Method and its activities can be identified with a systematic business activity by any other company.
5.6 The company M/s Maytas Properties Pvt Ltd. itself admitted that physical possession of the land was taken over in the year 2005-06 from various land owning companies. On verification of the present assessee-company records for the relevant period, it is clear that it has not offered any income under the Head “Income from Capital Gains” From this; it is evident that the assessee-company itself was not clear on method of treatment of the revenues received. If it were of the view that the proceeds are nothing but ‘gain’ obtained in the disposal of a capital asset, the same should have been offered for taxation in the first year 2005-06 itself as per the Transfer of Property Act, as the physical possession was given indicating that transfer was complete. By offering the same in the fin. Year 2007-08, indicates that the proceeds were gained from business.
5.7 Further, on verification of the agreement with M/s Maytas Properties Pvt Ltd. and subsequent developments, it is evident” that the assessee company never carried out its activities in isolation.
It carried out all its activities jointly with remaining land owning companies. On further verification of the sale deeds executed for various flats/bungalows buyers’, it is evident that for the registration of undivided share of land also, the pooled-up land was treated as “single piece of land”. Even the sale proceeds received from various flat/bungalow buyers’ were passed on to the land owning companies in the ratio of their land holding in the pooled up lands.
5.8 For all practical purposes such as sale of land, sharing of the sale proceeds etc., the activity was carried out as a single business venture only. The assessee-company and 13 other land owning ‘companies with the help of the agreement with the developer carried out systematic ,and planned activity of development of the area, construction of the apartments and bung lows, sale of the built-up area to various buyers, advertisement of the venture etc.
5.9 Though the lands were claimed to be agricultural lands, no agricultural activity was carried in these lands during any of the years. In fact, the land was subjected to various developmental activities such as, fencing, road laying etc., over a period of time.
5.10 On close observation of the financial statements of the assessee-company and 13 other companies which were land owners, it is clear that, in these cases, investment was not through the surplus of the funds, but was out of borrowals, unsecured loans and advances received. The assessee company never carried out any income earning activity prior to the present transaction and money mobilisation was as share capital, borrowals and unsecured loans.”
5. In the light of the above findings observations recorded by him, the Assessing Officer proceeded to consider the issue relating to the head of income under which the relevant profit earned by the assessee company was chargeable to tax. In this regard, he relied on the decision of the Hon’ble Supreme Court in the case of Sri G.Venkata Swamy Naidu & Co. V/s. CIT(35 ITR 594), wherein certain tests were laid down for determining whether a particular transaction is a transaction in the nature of investment or of an adventure in the nature of trade. Applying the said tests to the relevant facts as involved in the case of the assessee company, the Assessing Officer recorded his findings as under-
a. The purchase and sale of the lands are not allied to i s usual business of trade. In fact, there was no other business/trade for the assessee company to relate the present activity of sale of land.
b. The commodity in consideration was land. In the: present case, drawing the comparison is not possible as the assessee-company is not involved in any other regular business activities.
c. The assessee-company from the financial year 2002-03 to 2007-08 incurred certain expenditures such as, fencing the lan road laying other developmental activities. Subsequent to the agreement ith the builder i..e. M /s. Maytas properties limited, the later as per the understanding with the former, carried further developmental activities such as laying the roads, leveling the land, development of green belts, laying the sewerage lines, laying the al lines, developing the common amenities etc. In fact, the builder as developer constructed flats and bunglow s, subsequent to the agreement with the assessee-com pany. Then the final product i.e. built up area was systematically marketed with proper advertisement and with the support of deployed employees buyers were identified and built-up areas were sold at regular Intervals. Because of all these activities only, the commodity In the possession of the assessee-com pany i.e. land became readily salable. Thus due to the initial development activities by the assessee-com pany and subsequent developmental activities by the developer, the land became easily salable at more profitability.
d. A s mentioned above, the land purchased was not sold as it was subsequently. There were certain Incidents i.e. various developmental activities and constructions thereon, were closely associated with the sale of land.
e. The developmental activities, construction and systematic marketing are the usual activities associated with a regular business of construction of dwelling units. In the regular business of construction, the businessman will acquire the land, make it suitable for the developmental activities proposed,’ construct dwelling units as per the requirements, market them, and sell to various buyers though its deployed staff. The activities of the assessee-com pany In the present case can also be closely compared with the regular activities in the business of construction of dwelling units.
f. The purchase of the lands and sale of the dwelling units are repeated activities carried by the assessee company. It is clear from the following:
Details of lands acquired during the F.Y . 2002-03:
