Land sale by real estate developer was correctly treated as capital gain not as business income

ACIT Vs Mukesh Shah (ITAT Jodhpur)

Conclusion: Assessee had consistently shown the plots as investments in earlier years and that the nature of income could not be determined solely based on the nature of the business for tax audit purposes. Accordingly the sale of these properties was rightly considered as sale of capital assets rather than stock in trade.

Held: Assessee had claimed Short Term Capital Gain of Rs. 17,19,605/- on account of sale of immovable properties. AO considering the fact that assessee engaged in the business of real estate developer, was asked to explain why the income from sale of properties should not be assessed as business income instead of long term capital gain & short term capital offered by him. In response, assessee contended that few properties were purchased for investment purposes and the same were held as part of fixed assets in the preceding years. Accordingly the sale of these properties was considered as sale of capital assets rather than stock in trade. It was held that if the intention of assessee at the time of the purchase was to keep the same for appreciation than the gain on sale of the same was chargeable to tax under the head income from capital gain. If the intention of the assessee at the time of purchase was to sale the plots and earn profit than the profit on sale of the same was chargeable to tax under the head income from business.  CIT(A) had noted that big chunk of land were forming of the stock in trade and small plots which were for investment and consistently shown under the head capital assets even for the earlier years and thereby the claim of the assessee was considered after careful going on all the aspect of the matter. Against that detailed finding of CIT(A), AO did not brough on record anything contrary to the finding of facts so recorded in the order of CIT(A) and therefore, merely based on the nature of the business for tax audit purpose would not determine the nature of other head of income.

FULL TEXT OF THE ORDER OF ITAT JODHPUR

By way of this appeal revenue challenges the finding of the Commissioner of Income Tax (Appeals), Jaipur – 5, [ for short “CIT(A)” ] which was passed on 28/08/2023 and it relates to assessment year 2017-18.&nbspThat order of ld. CIT(A) arise because the assessee challenged the finding as recorded in the order of the assessment dated 26.11.2019 passed under section 143(3) of the Income Tax Act, [ for short Act ] by ACIT, Circle-6, Jaipur [ for short AO ]

2. In this appeal, the revenue has raised following grounds: –

1. Whether on the facts and in the circumstances of the case the Ld. CIT(A)was justified in deleting the addition of Rs. 80,00,000/- on account of cash deposited during demonetization when the assessee has not been able to justify the reason for accumulation of cash from July, 16 to Nov., 16 as the cash purchase of property was prohibited by law w.e.f. 01.06.2015.

2. Whether on the facts and in the circumstances of the case the Ld. CIT(A)was justified in not treating the sale transaction of property as business income of Rs. 66,99,427/- but as a Capital Gain, thereby ignoring the facts that nature of business of the assessee is ‘builder/property developer’ as declared in column 10(a) of the 3CD form.

3. Whether on the facts and in the circumstances of the case the Ld. CIT(A)was justified in allowing the deduction u/s 24(b) on rental income from plots of land ignoring the fact that there is no constructed house or building on these plots.

4. The appellant craves leave to add, amend or withdraw any of the ground of appeal during the course of appellant proceeding.

3. Succinctly, the fact as culled out from the records is that the assessee has e-filed his return of income on 04.10.2017 declaring total income of Rs. 36,64,810/-. The return was processed u/s 143(1) of Act. Subsequently, the case was selected for scrutiny through CASS and notice u/s 143(2) of Income Tax Act, 1961 was issued on 29.09.2018 which was duly served upon the assessee. Notice u/s 142(1) along with query letter dated 30.05.2019 was issued and duly served upon the assessee and the same was complied with. Necessary details and explanations were furnished by the assessee through e-proceedings portal, which were placed on record by ld. AO.

3.1 For the year under consideration the assessee is engaged in the business of trading of agri-commodities and development of properties. During the year under reference, the assessee has shown income from salary, house property, income from business and profession, income from capital gain and income from other sources.

3.2 After considering the facts of the case and replies submitted by the assessee ld. AO noted that the assessee deposited cash of Rs 80,00,000/- in the bank account between 9.11.2016 to 30.11.2016. While the assessment proceedings assessee was asked to explain the source of the cash deposit in the bank account. In response assessee stated that he has already submitted response in respect of cash deposited by him in his bank account during the demonetization period. He has also furnished the copy of the response sheet submitted by him. On perusal of the response sheet, ld. AO noticed that the assessee has claimed that the cash was deposited out of the withdrawals made from the bank. Vide query letter dated 11.10.2019, the assessee was specifically asked to explain the reason for withdrawing cash from his bank account despite having sufficient cash in hand. In response, the assessee stated that assessee was planning to start the project under “Mukhya mantri Jan awas Yojana in Sri Ganganagar and for that purpose he withdrew cash from the bank over a period of time. He further claimed that since acquisition of land for that purpose, completion of various other formalities required cash and that is why he accumulated cash in hand balance by withdrawing cash from bank in August, September and October 2016. He further claimed that since the deal failed to materialize, cash could not be utilized. Subsequently due to demonetization, the cash was deposited into the bank account. Ld. AO considered the submission of the assessee and but did not consider that reasons as acceptable, as reasoned in the order and same reads as under :-

1. The arguments of the assessee are too general in nature and lack any substance.

2. The closing cash balance at the end of the month of July was Rs.11,17,717. As evident from the break-up of the sales and purchase, all the purchases have been made at credit. In such a scenario why assessee will need additional cash in hand balance. Thus it is out of common understanding that assessee kept on accumulating cash balance by withdrawing another 27lacs in the month of August, 54 lacs in the month of September and Rs18,00,000/- in October 2016.

3. Even if the claim of the assessee is accepted as far as planning to start a real estate project is concerned, the same do not lend any substance to the holding of such a huge cash balance as even the property purchase in cash has been prohibited by law w.e.f 01.06.2015. In fact, had he really planned such a project he would have needed amount in the bank rather than cash to invest in the purchase of the property.

4. Such claims of accumulating cash balance for investment in the project under Mukyamantri Jan Awas Yojana have been made by the Id. Chartered Accountant despite knowing the fact that the property purchase in cash has been prohibited by law w.e.f 01.06.2015. This shows that assessee is merely making a story to somehow create source for the cash deposits.

5. The assessee did not even submit any evidence such as any agreement or contract signed with any party to establish his intention use such a huge amount of cash in purchase of property etc.

6. The assessee deposit the cash amounting to Rs. 80,00,000/- in old bank notes on 21.11.2016.

7. Not even a single penny has been shown as advance amount paid to any party for purchasing their land therefore, the claim of the assessee regarding negotiation for procurement of land is not acceptable.

In view of the above discussion, the cash deposit of Rs 80,00,000/- was added to income of the assessee under the provisions of section 68 r.w.s. 115BBE of the IT Act, 1961 @ 60% by the ld. AO.

3.3 Ld. AO also noted from the computation of income filed that the assessee has claimed Short Term Capital Gain of Rs. 17,19,605/- on account of sale of immovable properties. Ld. AO considering the fact that the assessee engaged in the business of real estate developer, therefore, vide notice dated 11.10.209, the assessee was asked to explain why the income from sale of properties should not be assessed as business income instead of long term capital gain & short term capital offered by him. In response, the assessee vide submission dated 5.11.2019 contended that few properties were purchased for investment purposes and the same were held as part of fixed assets in the preceding years. Accordingly the sale of these properties was considered as sale of capital assets rather than stock in trade. Ld. AO considered the submission of the assessee but did not found acceptable and for which he has given following reasons:

1. The nature of business in the column no 10(a) of the form no. 3CDis mentioned as ‘builder’ and sub-sector is mentioned as ‘property developers’. Once assessee is into business of ‘property developers’, it is not open to him to treat certain property sales as capital transactions and others as business transaction.

2. Assessee did not furnish any worth-while explanation as to show on what basis he classifies plots as capital assets or part of stock.

3. The perusal of the trading account shows that there are various plots which have been purchased prior to 2010 and the same are held as closing stock till date. Assessee failed to establish that why those plots acquired prior to Central Circle 2010 were kept as stock without doing any development activities and kept certain other plots as capital investment.

4. It is an attempt on the part of the assessee to evade tax by reducing tax-liabilities on account of claim of indexation benefit.

3.4 ld. AO further went on observing that the sale of plot was business income as the assessee is engaged in the business activities of sale / purchase / developing of properties. Thus, the transactions fall in the category of adventure in the nature of trade or business transactions. It is pertinent to mention here that in order to constitute a transaction as adventure in the nature of trade, it is essential that the transaction should be akin to the main activity carried on by the assessee. The assessee is engaged in the business of real estate developer. Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC) has laid down test for coming to a conclusion whether a particular transaction is adventure in the nature of trade or not. Hon’ble Bombay High Court in the case of CIT v. Himalayan Tiles and Marbles (P) Ltd. (1975) 100 ITR 177 (Bom) for the same proposition. The word ‘business’ has been defined in Section 2(13) of the IT Act which reads as under:

“Business” includes any trading, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

The above definition has used the words ‘trade’ ‘commerce’ or ‘manufacture’ or “any adventure or concern in the nature of trade, commerce or manufacture”. The Hon’ble Gujarat High Court in the case of CIT v. Motilal Heerabhai Spinning and Weaving Co. Ltd. (1977) 113 ITR 173 (Guj) and Hon’ble Delhi High Court in the case of Bharat Development (P) Ltd. v. CIT (1982) 133 ITR 470 (Del) has observed that the word ‘business’ is of large and indefinite import and connotes something which occupies the time, attention and labour of a person normally with the object of making profit. Hon’ble Calcutta High Court in the case of Turner Morission & Co. (1929) ILR 56 (Cal) 211 and the Hon’ble Orissa High Court in the case of Narasinghakar. & Co, v. CIT (1978) 113 ITR 7-12 (Ori) have held that the word ‘business’ denotes continuous and systematic exercise of an occupation or profession with an object of making profit. Neither the term “Business” nor the term “Adventure in the nature of trade” is defined under the provisions of Income tax Act, 1961. Therefore, ld. AO considered the dictionary Zmeaning, for each word separately, which he considered in his reads is reproduced herein below ;

As far as the word ‘adventure’ is concerned, it implies a pecuniary risk, a venture, a commercial purpose. The word ‘venture’ is defined as a commercial activity in which there is a risk of loss as well as a chance of gain.

The term ‘trade’ in the context of the definition of the expression ‘business’ is a wider concept and once this term is associated with the term ‘adventure, ‘the scope is further enlarged. The term ‘trade’ means the action of buying and selling goods and services between two or more parties in consideration of money or money’s worth.

Based on the above definition, the “adventure in the nature of trade or commerce” can be defined as a pecuniary risk or venture of buying and selling the goods or services between two or more parties in consideration of money or money’s worth where there is a risk of loss as well as chance of gain and these activities may be quite similar to the ordinary business. Hon’ble Courts in the cases Khan Bahadm Ahmed Alladin& Sons v. CIT (1968) 68 ITR 573 (SC), P. Mohd. Meera Khan v. CIT (1969) 73 ITR 735 (SC). Premji Bhimji. v. CIT (1971) 81 ITR 179 (Cal), CIT v. H. Holck Larsen (1986) 160 1TR 67 (SC) and CIT v. VA.Trivedi (1988) 172 ITR 95 (Bom) have held that it was not possible to evolve any single test or formula which can be applied in determining whether a transaction is adventure in the nature of trade or not. The answer to question must necessarily depend in each case as the total impression and effect of all the relevant factors and circumstances which determine the character of the transaction. The expression ‘adventure in the nature of trade clearly suggests that the transaction cannot properly be regarded as a trade or business. It is allied to transaction that constitutes trade or business but may not be trade or business itself. It is characterized by some of the essential features that make up trade or business but not by all of them and so even an isolated transaction can satisfy the description of an ‘adventure in the nature of trade’. The above observation is duly supported by the decisions, of Hon’ble Bombay High Court in the case of Estate Investment Co. Ltd. v. CIT (1980) 121 ITR 580 (Bom), and the decision of Hon’ble Madhya Pradesh High Court in the case of Bhagirath Prasad Bilgaiya v. CIT (1983) 139 ITR 916 (MP). It is not necessary that there should be a series of transactions, both of purchase and of sale, a single transaction of purchase and sale outside the assessee’s line of business may constitute adventure in the nature of trade. Neither repetition nor continuity of similar transaction is necessary to constitute a transaction and adventure in the nature of trade. If there is repetition and continuity, the assessee would be carrying on business and the question whether activity is an adventure in the nature of trade can hardly arise. The transaction may be regarded as isolated although a similar transaction may have taken place a fairly long time before. The above observations find support from the decision of Hon’ble Supreme Court in the case of CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC). Hon’ble Supreme Court in the case of G. Venkataswami Naidu vs. CIT (1959) 35 ITR 594(SC) has observed that the certain factors are relevant for deciding the character of a transaction. These factors and their fulfilment in the case under reference was discussed by AO and the same is reproduced herein below:-

Ld. AO based on the above discussion and considering the parameters set by the Hon’ble Supreme Court in the afore mentioned case, the sequence of events leading to the eventual sale of the plots do not seem to help the cause of the assessee. The assessee purchased the plots under reference in 2012-13, 2014-15 & 2016-17 and sold the same in the year under reference. As the assessee is engaged in the business of real estate and property developer therefore, the sale of these plots covered within the business activities of the assessee and income from the same constitutes business income. Reliance was placed from the Hon’ble Rajasthan high Court judgment in the case of Sohan Khan and Mohan Khan as reported in 304 ITR 194(Raj.). Accordingly, ld. AO held that the transaction of sale plots was in the nature of business activities and the claim of the assessee regarding indexation benefit was disallowed. The business income of the assessee from the sale of the plots was recomputed in the following manner:-

Accordingly, the income of Rs.66,99,427/- was added to the business income of the assessee. This resulted into addition of Rs. 66,69,427/- to the total income of the assessee and taxed in his hands accordingly under the head income from business and profession.

3.5 The assessee has also made certain other plots as part of fixed assets rather than stock in trade. However, the same was not disturbed or reworked merely due to the fact that such reworking will not have any impact on the profit from the real estate business as the same amount will be taken to both opening and closing stock. However, this does not mean that the claim of assessee regarding other plots being capital asset and their inclusion in the fixed asset schedule was considered as accepted. All the immovable property which are not being used by assessee in his business are part of stock only.

3.6 Ld. AO in the pendency of the assessment proceeding noted that the assessee has shown income from plots under the head income from house property and claimed deduction u/s 24(a) of the IT Act. Rental income from plots is chargeable to tax as income from other sources instead of income from house property. Therefore, rental income received by the assessee from plots was treated as income from other sources and claim of the assessee for deduction u/s 24(a) of the Act was disallowed and added to the total income of the assessee. This would result in addition of Rs. 36,750/- and entire rental income of Rs. 1,22,500/- was treated as income from other sources.

Based on that observation the ld. AO completed the assessment on 26.11.2019.

4. Aggrieved from the order of Assessing Officer, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant finding of the ld. CIT(A) is reiterated here in below:

Finding on cash deposit

“4.3 I have considered the facts of the case gone through the submission and the paper book. It is seen that the assessee has maintained day to day books of accounts which are duly audited and has been accepted by the AO. The cash deposit is made in the regular bank account of the assessee. The assessee has explained the source of cash deposit as withdrawals made from the regular bank account in the month of August 2016 to September 2016. The appellant had submitted the cash balance position as under:-

The above position of cash balance is clealy showing the source of cash deposit in bank account. The AO has not brought any evidence to establish that this cash has been utilized some where else. In the absence of such evidence, the claim of the assessee can’t be rejected specially when the books of accounts have been accepted and no evidence of use of cash for other purpose was brought on record by the AO. The various cases relied by the appellant supports his case. In these facts, I find that the source of cash deposit during the demonetization period is verifiable from the earlier bank withdrawals itself and therefore the addition of Rs.80,00,000/-made by the AO is deleted. In the result, this ground of appeal is allowed.

Finding on Business Income or capital gain

5.3 I have considered the facts of the case gone through the submission and the paper book. On perusal of the facts and submission I find that the assessee is dealing in real estate as well as also making investment in real estate. He has also filed the details of the lands which are held as stock in trade and the registry of the plots treated as capital assets. On going through the same it is seen that the land shown in the stock in trade are mainly big chunk of land whereas plots classified in capital assets are mainly small plots. The plots sold by him during the year are consistently shown under the head fixed assets in earlier years as evident from the fixed asset chart of earlier years filed in the paper book. This fact has not been disputed by the AO. I further find that whether the plot sold by the assessee represents stock in trade or capital assets is to be seen from the intention of the assessee at the time of the purchase of the plot. If the intention of the assessee at the time of the purchase is to keep the same for appreciation than the gain on sale of the same is chargeable to tax under the head income fom capital gain. If the intention of the assessee at the time of purchase is to sale the plots and earn profit than the profit on sale of the same is chargeable to tax under the head income from business. In this case the intention of the assessee is clear from the fact that the same is regulary shown under the head fixed assets. The various cases relied upon by the assessee also supports his case. Considering all these facts, the action of the AO in treating the profit on sale of the plots as business profit is rejected and the AO is directed to assess the gain on sale of these plots under the head capital gains as declared by the assessee. In the result this ground of appeal is allowed.

Finding on deduction of house property

6.3 I have considered the facts of the case gone through the submission and the paper book. I find that in respect of rent from plot no. T-03, T-03A, T-04A, the assessee has agreed that the same should be taxed under the head income from other sources as this is rent from open land only. Therefore, the disallowance to the extent of Rs. 6750/- u/s 24(a) in respect of rent from these plots is confirmed.

So far as rent from property Sl. -05, 9,10 is concerned, I find that this rent is from building given on rent as evident from the rent agreement, water and electricity bills filed before the AO. Therefore the same has correctly been offered by the assessee under the head income from house property. Accordingly the disallowance of Rs.30,000/- made u/s 24(a) is deleted. In the result, this ground of appeal is partly allowed.

5. Feeling aggrieved from the finding so recorded in the order of ld. CIT(A), revenue preferred the present appeal challenging the finding of the ld. CIT(A) on the grounds as reproduced herein above.

Apropos to the grounds so raised ld. DR representing the revenue relied on the finding recorded herein above. As the same has been reproduced herein above the same are not repeated.

6. On the other hand, ld. AR of the assessee supporting the finding so recorded in the order of ld. CIT(A). In support of that order ld. AR of the assessee also filed a written submissions in respect of the various grounds raised by the revenue and the same is reproduced herein below:

1. The assessee is engaged in the business of trading of agri-commodities and development of properties. He also invest in the properties. The return of income was filed on 04/10/2017 declaring total income of Rs.36,64,810/-.

2. In course of assessment proceedings AO observed that the assessee has made cash deposit of Rs.80,00,000/- in his bank account between 09-11­2016 to 30-11-2016 i.e. during demonetization period. The assessee explained that same is out of earlier withdrawals made by him from his bank account as under:-

3. The A.O required the assessee to explain the reason for withdrawing cash from his bank account despite having sufficient cash in hand. The assessee filed the explanation which is reproduced at page 2 of the assessment order. The AO, however, rejected the explanation of assessee as per the finding given at Para 3.3 of the order and thus made addition of Rs.80,00,000/- u/s 68 of the Act.

4. The Ld. CIT (A) at Para 4.3 Page 10-11 of the order held that assessee has maintained the day to day books of accounts which are duly audited and accepted by the A.O. The cash is deposited out of the withdrawals made from the regular bank accounts in the month of Aug 16- Sep16. A.O has not brought any evidence to establish that this cash has been utilized somewhere else. The various cases relied by the assessee supports his case. Accordingly he deleted the addition made by the A.O.

Submission:

1. The finding of CIT (A) is relied upon. In fact the source of cash deposit is verifiable from the cash book maintained in the normal course of business. As per the cash book the position of opening balance, cash withdrawal from bank, cash deposited in the bank and the cash utilized by the assessee is as under:-

The AO has accepted the books of accounts of assessee maintained in the normal course of business. On the basis of these audited books of accounts he has assessed the income of the assessee. He has not disputed the cash withdrawals from the bank account. After considering this cash withdrawals the cash balance as per cash book is much more than the amount of cash deposited in the bank account. The AO has not brought any evidence to indicate that the cash withdrawal from the bank account has been utilized somewhere else. Therefore CIT (A) has rightly accepted the source of cash deposit in the bank account.

2. Reliance in this connection is placed on the following cases :-

Muon Computing (P) Ltd. vs. ITO (ITA No. 7606/Del/2019) 4^th Aug, 2021 (ITAT Del)

Para 9 of this decision is reproduced as under:

“9. There is no dispute with regard to the fact that Revenue has not brought any material suggesting that the withdrawal made by the assessee were utilized for making payments. It is also not brought on record that the amounts so withdrawn from the bank account was utilized for any other undisclosed purposes. Further, it is noticed that learned CIT(A) observed that despite having sufficient cash in hand, the assessee withdraw the amount. It is correct that the assessee has withdrawn higher amounts than the immediate preceding years but that cannot be sole reason for making addition purely on the basis of suspicion. Further, I failed to understand the reasoning of the AO that the amount was withdrawn to justify the cash deposits during demonetization period i.e., between 9th Nov., 2016 to 30th Dec., 2016. It is also seen that the cash was withdrawn much prior to such event. So far observation regarding sharp increase in payable expenses is concerned, there is no finding by the AO that such expenses are bogus. Therefore, in my considered view, the addition has been made purely on the basis of suspicion. Such action of authorities below cannot be affirmed. I, therefore, direct the AO to delete the impugned addition. Thus, ground raised by the assessee in this appeal is allowed.”

Nand Kumar Taneja & Anr. vs. ITO(2019) 55 CCH 0705 (DelTrib) Para 6 & 7 of this decision is reproduced as under:-

“6. Apart from that, the details of; opening cash, cash withdrawal, cash deposited, cash expenditure; closing cash in hand and increase cash in hand, in case of both the assessees were given before the authorities below, which has been incorporated above in para 3 and 3.1 No discrepancy or any inquiry has been done by Assessing Officer to disapprove the cash disclosed in the books of account and balance sheet. The sole reason for disbelieving the assessee’s explanation is that, firstly, no prudent person after withdrawing the cash will keep at home; and secondly, if there was an OD account having negative balance on which interest is being charged, then there was no need to keep such huge cash in hand at home. Such reasoning dehors any contrary material on record that the cash disclosed in the books of accounts has been invested somewhere else, then on mere surmise assessee’s explanation cannot be discarded. If assessees have genuine sources of income which are received through banking channels, out of which cash has been withdrawn and have been disclosed in the income tax return and in the balance sheet as cash-in-hand, then I am unable to apprehend how the provision of section 69A is applicable. Because the section can only be invoked where in any financial year the assessee is found to be the owner of any money, etc., which has not been recorded in the books of accounts and assessee offers no explanation. Here in these cases, Assessee’s cash in hand duly stands recorded and source has been explained from the income deposited in the bank account and withdrawal, then in my opinion deeming provision of section 69A cannot be invoked. The reasoning given by the AO and Ld. CIT (A) is vague and based on surmise as to what a prudent person should have done. Once assessee has explained that being of senior citizen they have maintained such liquidity of cash out of their own disclosed income with them for certain contingencies, then without any material to controvert such an explanation, addition cannot be sustained. Assessees before the lower authorities have filed following documents to substantiate the cash in hand with them:-

a. Income Tax Return with computation of total income.

b. Balance Sheets for FY 2013-14, 2014-15 and FY 2015-16.

c. Comparative Chart of cash movement FY 2013-14, 2014-15 and FY 2015-16.

d. Cash book maintained by the assessee.

e. Kotak Mahindra Bank Statement bearing A/c No. 6311509485

f. Standard Chartered Bank: Statement of account.

g. Bank: Book of Kotak Mahindra Bank.

h. Bank Book of Standard Chartered Bank.

i. Copy of all medical treatment documents.

All these documents have neither been rebutted nor there is any finding that cash-in-hand disclosed in the balance sheet was beyond the scope of their income or are not substantiated from the bank account. Simply because after the period of demonetization, that is, 08.11.2016, certain amount of cash has been deposited in the bank account, it does not mean that the cash-in-hand as on 31.3.2015 and 31.03.2016, duly shown in the balance sheet and disclosed to the department in the respective income tax return filed much earlier, is unexplained. Accordingly, in view of the above reasoning, addition made by the AO and sustained by the Ld. CIT (A) is directed to be deleted.”

Krishna Agarwal vs. ITO (2021) 63 CCH 0048 (JodhTrib)

Para 14 of the decision is reproduced as under:-

“14. In this regard, it is noted that the assessee has explained that out of earlier year’s cash withdrawals from her bank account which were available as cash balance as on 01/04/2016, the assessee had deposited a sum of Rs. 68,95,000/- in her bank account during the year under consideration. It has been submitted that the assessee has sold a property, transferred in her name after the death of her husband, for a consideration of Rs 1,31,45,200/- during the financial year 2015-16 and the sale consideration has been received in installments during the financial year 2014-15 and financial 2015-16 directly in her bank account which has been subsequently withdrawn from time to time and due to non-fulfillment of purpose for which the cash was withdrawn, it was again re-deposited in the bank account during the year under consideration. In this regard, it is noted that the assessee in her return of income for A.Y 2016-17 has disclosed sale consideration on sale of plot of land for Rs 1,31,45,200/- and offered capital gains to tax. The plot has been sold through a registered deed and the valuation has been determined at Rs 1,31,45,200/- by the stamp duty authority. Thus, the sale consideration equivalent to stamp duty value has been duly disclosed by the assessee and there is no finding that the assessee has received any amount over and above the declared sale consideration. Therefore, given that the sale consideration has been received directly in the assessee’s bank account, the source of cash withdrawals in the earlier two years has been clearly demonstrated by the assessee and we see no reason but to accept the said explanation which is clearly demonstrated through the sale documentation and tax filings by the assessee”.

Neeta Breja, New Delhi vs ITO ITA No. 524/Del/2017 order dt.25.11.2019 :­The Hon’ble bench at Para 12 of its order held as under:-

“12. In the present case also the learned assessing officer or the learned CIT A did not show that above cash was not available in the hands of the assessee or have been spent on any other purposes. Further the coordinate bench in ACIT vs Baldev Raj Charla 121 TTJ 366 (Delhi) also held that merely because there was a time gap between withdrawal of cash and cash deposits explanation of the assessee could not be rejected and addition on account of cash deposit could not be made particularly when there was no finding recorded by the assessing officer or the Commissioner that apart from depositing this cash into bank as explained by the assessee, there was any other purposes it is used by the assessee of these amounts. In view of above facts, the ground number 1 of the appeal of the assessee is allowed and orders of lower authorities are reversed.”

DCIT Vs Veena Awasthi (ITAT Lucknow) (2018) ITA No.215/LKW/2016 order dt.30.11.2018

The Hon’ble ITAT AT Para 8 of its order held as under:

“8. We have perused the case record and heard the rival contentions. We find that addition has been made by the Assessing Officer, as is evident from his order, on the ground that he has come to the conclusion that cash deposits were from some other source of income which is not disclosed to the Revenue. Assessing Officer nowhere in his order has brought out any material on record to show that assessee is having any additional source of income other than that disclosed in the return nor Assessing Officer could spell out in his order that cash deposits made by the assessee was from some undisclosed source. All throughout Assessing Officer has raised suspicion on the behavioural pattern of frequent withdrawal and deposits by the assessee. There is no law in the country which prevents citizens to frequently withdraw and deposit his own money. Documentary evidences furnished before the Revenue clearly clarifies that on each occasion at the time of deposit in her bank account, assessee had sufficient availability of cash which is also not disputed by the Revenue. Entire transaction of withdrawals and deposits are duly reflected in the bank account of the assessee and are verifiable from relevant records. Assessing Officer himself admitted that assessee had sufficient cash balance on each occasion at the time of deposit in her bank account on different dates during the assessment year under consideration. We have also examined the order of ld. CIT(A) and we find that his decision is based on facts on record and is supported by adequate reasoning and, therefore, we do not want to interfere with the order of ld. CIT(A) and accordingly we uphold the findings of the ld. CIT(A) sustaining relief granted to the assessee.”

3. It is submitted that assessee has withdrawal the cash from the bank account as he was planning to start the project under ‘Mukhya Mantri Jan Awas Yojna’ but since the deal did not materialized, the cash was deposited back in the bank account. This explanation has not been accepted by the A.O on suspicion without bringing on record any material to show that cash so withdrawn has been utilized somewhere else. The department in its ground has taken an objection that when cash purchase of property was prohibited by law w.e.f. 01.06.2015, the explanation given by the assessee is not justified by ignoring the fact that assessee has nowhere stated that he has withdrawn the money for purchase of land. Further AO ignored the fact that when out of such cash withdrawal, Rs.18,25,000/- deposited in the bank in Oct-2016 has been accepted, there is no reason not to accept the cash of Rs.80,00,000/- deposited in the bank in Nov-2016 out of the same cash withdrawal.

In view of the above the order of CIT (A) be upheld by dismissing the ground of the revenue.

Ground No.2

Whether on the facts and in the circumstances of the case the Ld. CIT (A) was justified in not treating the sale transaction of property as business income of Rs.66,99,427/- but as Capital Gain, thereby ignoring the facts that nature of business of the assessee is ‘builder/property developer’ as declared in column 10(a) of the 3CD form.

Facts:

1. During the year under consideration assessee sold certain plots held as investment. On sale of the same he computed short term capital gain of Rs.7,60,849/- and long term capital gain of Rs.9,58,756/- as under -:

A. Short term capital gain

B. Long term capital gain

2. The A.O however assessed the same as income from business by holding that in Form No.3CD, Clause no.10(a) is stated to be property developers. Once assessee is into the business of property developers it is not open to him to treat certain property sales as capital transactions. The trading account shows that plots purchases prior to 2010 are held as closing stock. He therefore treated the sale of plot as business income by referring to certain decisions and thus treated the profit on sale of plots offered as Capital Gain as business income and made addition of rs.66,99,427/-.

3. The Ld. CIT (A) at Para 5.3, Page 19 of the order observed that the land shown as stock in trade are mainly big chunk of land whereas plots classified in capital assets are mainly small plots. The plots sold during the year are consistently sold under the head fixed assets in earlier years. This fact has not been disputed by the A.O. Whether plots sold represent stock in trade or capital asset is to be seen from the intention of the assessee at the time of purchase of the plot. The intention of the assessee is clear from the fact that same is regularly shown under the head fixed asset. The various cases relied by the assessee also supports his case. Accordingly he directed the A.O to assess the gain on sale of plots under the head Capital Gains.

Submission:

1. It is submitted that whether the plot sold by the assessee represents stock in trade or capital assets is to be seen from the intention of the assessee at the time of the purchase of the plot. If the intention of the assessee at the time of the purchase is to keep the same for appreciation than the gain on sale of the same is chargeable to tax under the head income from capital gain. If the intention of the assessee at the time of purchase is to sale the plots and earn profit than the profit on sale of the same is chargeable to tax under the head income from business.

2. In the present case the assessee has sold 5 plot of land. Assessee has earned short term capital gain of Rs.7,60,849/- on sale of two plots. A.O held that the same should be treated as business income. It may be noted that rate of tax on the short term capital gain and business income is same and therefore to the extent of the short term capital gain declared by the assessee at Rs.7,60,849/- which is assessed by A.O a s business income is tax neutral.

3. In respect of remaining three plots, assessee claimed long term capital loss of Rs.4,51,684/- on sale of 2 plot located in Malviya Nagar, Jaipur and Long term capital gain of Rs.14,10,440/- on sale of a plot located in Tilak Nagar, Jaipur. These plots were purchased by assessee during the F.Y. 2012­13 with the intention to hold it as capital investment. The same is shown as Fixed Asset in the books of accounts of assessee and not under Stock in Trade of business. Thus what is sold is the capital asset and not the stock in trade and therefore gain on sale thereof is chargeable under the head Capital Gains.

4. The A.O has held that since the assessee is also dealing in properties therefore the Income from sale of plots on which LTCG is declared needs to be assessed as Business Income. There is no law that a person who is engaged in the Business of Properties cannot hold a property as investment. The CBDT Circular No.4/2007 dt.15.06.2007 in respect of share transactions has clarified that an assessee can have two portfolios of share, one as Investment portfolio and one as Trading portfolio. However he has not permitted to shift from one portfolio to another portfolio. Therefore simply because assessee is engaged in the business of property developments, it cannot be held that gain from properties which are held as Capital Asset would be chargeable to tax as Business Income. For this reliance is placed on the decision of Chennai Tribunal in case of H. Mohamed Nowfel vs. Assistant Commissioner Of Income Tax (2020) 60 CCH 0222 wherein it is has held as under:-

“Merely for the reason that assessee was into real estate business and involved in buying and selling of lands for profits, profit derived from sale of agricultural land cannot be brought to tax under the head ‘income from business or profession”.

Further Hon’ble ITAT Ahmedabad Bench in case of Hitesh Kumar Ashok Kumar Vaswani Vs. JCIT 2017 157 DTR 167 held as under:-

“Assessee having sold few plots during the relevant year out of the large land portfolio which was held for considerable time and shown as capital investment all along and has been subjected to wealth-tax, the land/property was held by the assessee as capital asset. Act of usage of borrowed funds by itself is not sufficient to substitute the declared intention of the assessee and alter the character of the asset substantially. Allegation of the revenue that land has been converted into non-agricultural land prior to its sale is of no effect. Such act can only be with a view to maximize the gain on sale of property by a prudent investor for which he cannot be faulted. No adverse inference is permissible on account of the land was made to a developer. What is relevant to determine the issue is to enquire into the intention at the time of acquisition of the asset and not when the asset is proposed to be sold. Revenue has not alleged any real substantive and systematic course of activity or conduct with set purpose. Sec. 2(14) stipulates that property can be ‘capital asset’ even if connected with business of the assessee. Thus, assessee is entitled to hold certain class of assets as capital asset even while he is dealing with the asset of similar nature in business with commercial objectives. Accordingly, land/properties were held by the assessee as ‘capital assets’ before its sale and consequential gains arising on sale thereof is chargeable under the head ‘capital gains’.

5. The AO has heavily relied on the Supreme Court decision in case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 to hold that gain on sale of properties is Business Income. However he has not properly analyzed the said decision. The factors considered in that decision, observation of the AO on applicability of these factors and the explanation of the assessee thereof is tabulated as under:-

In view of the above the action of the A.O in treating the long term/ short term capital gain as Income from Business is incorrect and therefore the Ld. CIT(A) ahs rightly directed the A.O to assess has gain on sale of plots under the head Capital Gain . Hence, the order of CIT (A) be upheld by dismissing the grounds of the department.

Ground No.3

Whether on the facts and in the circumstances of the case the Ld. CIT (A) was justified in allowing the deduction u/s 24(b) on rental income from plots of land ignoring the fact that there is no constructed house or building on these plots.

Facts & Submissions :-

1. The assessee has declared Income From House Property at Rs.1,22,500/- from the following two properties:-

2. A.O observed that the assessee has claimed deduction u/s 24(a) whereas the same being income from plot are to be assessed under the head Income from Other Sources. Accordingly he disallowed the claim of deduction u/s 24(a) for Rs. 36,750/-.

3. The Ld. CIT (A) at Para 6.3 of its order observed that the assessee has agreed that the rent of Plot No T-03, T-03A & T-04A should be assessed under the head Income from Other Sources and thereby confirm the disallowance to the extent of Rs.6,750/-. However, in respect of property at SI-05, 9 & 10 , he held that from the rent agreement and water electricity bills filed before the A.O it is evident that the rent is form the building and thereby the disallowance of Rs.30,000/- made u/s 24(a) is deleted.

4. It is submitted that during the year under consideration the assessee has earned rental income of Rs.1,00,000/- in respect of constructed building at SI-05, 09, 10. This building is given on rent to Gurdeep Singh and Kulvinder Singh. Copy of the rent agreement in support of the same was filed to the A.O. In the return the same has been wrongly mentioned as plot rent instead of building rent. The Ld. CIT (A) after pursuing the rent agreement has rightly deleted the disallowance of Rs.30,000/- made u/s 24(a) of the Act and therefore the order of CIT (A) be upheld by dismissing the grounds of the department. ”

7. To support the contention so raised in the written submission reliance was placed on the following evidence / records / decisions:

8. The ld. AR of the assessee in addition to the above written submission so filed vehemently argued inviting our attention at page 51 & 52 of the paper book that stamped rent deed though period of 11 months but that rent of premises was continued from 10.09.2016 onwards and was renewed on 01.05.2019. This strengthen the contention revenue did not challenge that records so produced. As regards the cash which was withdrawn was available and revenue could not found any use of the same the contention of the assessee rightly considered by the ld. CIT(A).

9. As is evident from the above that both the parties relied on the finding recorded in the order of the lower authority as favourable to them.

10. We have heard the rival contentions and perused the material placed on record. Since the facts of the case, finding of the AO and that of the ld. CIT(A) has been discussed herein above the same are not repeated to avoid the duplication.

11. First ground of revenue is that Ld. CIT(A) was not justified in deleting the addition of Rs. 80,00,000/- on account of cash deposited during demonetization when the assessee has not been able to justify the reason for accumulation of cash from July, 16 to Nov., 16 as the cash purchase of property was prohibited by law w.e.f. 01.06.2015. Thus, the revenue before us also did not challenge the finding of fact that the assessee was having sufficient cash on hand. Since that fact of having the sourced cash on hand is not disputed other presumption and assumption as to the reasons of having cash on hand will not help to the revenue. We also considered the various judgment cited by the ld. AR of the assessee to support the view of the ld. CIT(A). Thus, we do not find any merits in the ground no. 1 raised by the revenue and thereby the same is dismissed.

12. Ground no. 2 raised by the revenue challenges the action of the ld. CIT(A) in treating the sale transaction of property as business income of Rs. 66,99,427/- but as a Capital Gain, thereby ignoring the facts that nature of business of the assessee is ‘builder/property developer’ as declared in column 10(a) of the 3CD form. Here also that the ground of appeal of the revenue is merely raised based on the nature of business shown at column 10(a) of tax audit report filed wherein the assessee declared the nature of the business as builder / property developer and therefore, revenue pressing that whatever capital gain shown by the assessee also required to be taxed under the head business and profession since the assessee builder / developer of property. On careful perusal of the finding of the AO, submission of the assessee before the ld. CIT(A) and that of the finding of the ld. CIT(A) who has categorically given finding that the assessee has filed the details of the lands which are held as stock in trade and the registry of the plots treated as capital assets. On going through that records ld. CIT(A) has noted that big chunk of land are forming of the stock in trade and small plots which were for investment and consistently shown under the head capital assets even for the earlier years and thereby the claim of the assessee was considered after careful going on all the aspect of the matter. Against that detailed finding of the ld. CIT(A), ld. AO through the ld. DR did not brough on record anything contrary to the finding of facts so recorded in the order of the ld. CIT(A) and therefore, merely based on the nature of the business for tax audit purpose will not determine the nature of other head of income. In the light of the above discussion, we do not find any infirmity in the detailed finding of the ld. CIT(A) and therefore, the ground no. 2 raised by the revenue stands dismissed.

13. The last and third ground of appeal raised by the revenue deals with the action of ld. CIT(A) in allowing the deduction u/s 24(b) on rental income from plots of land ignoring the fact that there is no constructed house or building on these plots. We take note of the fact that Ld. CIT (A) at Para 6.3 of his order observed that the assessee has agreed that the rent of Plot No T-03, T-03A & T-04A should be assessed under the head Income from Other Sources and thereby ld. CIT(A) confirmed the disallowance to the extent of Rs.6,750/-. Whereas for the property at SI-05, 9 & 10 , he held that from the rent agreement and water electricity bills filed before the A.O the rent offered as income received form the building and thereby the disallowance of Rs.30,000/- made u/s 24(a) was deleted. The bench also noted the property was given on rent to Gurdeep Singh and Kulvinder Singh. Copy of the rent agreement in support of the same was filed to the A.O. In the return the same has been wrongly mentioned as plot rent instead of building rent. The Ld. CIT (A) considered those explanation and allowed the claim of the assessee in part. Ld. AR of the assessee also submitted that the similar claim of the same property was allowed in the appellate proceeding by the ld. CIT(A) while dealing with the appeal of the assessee for A. Y. 2018-19. The revenue could not provide any justification as why the said detailed and consistent finding of the ld. CIT(A) does not hold good when it is supported by the facts already placed on record before the ld. AO and thereby, we dismiss the ground no. 3 raised by the revenue.

In the result, the appeal of the revenue is dismissed.

Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board.