Brief of the Case
Delhi High Court held In the case of Raj Dulari Bhasin vs. CIT that merely because the Assessee approached the builder for constructing the flats on the portion apart from the already constructed portion, would not make the transaction an ‘adventure in the nature of trade’. There is no material to show that the Assessee ever had the intention to exploit the plot as a commercial venture. All that the Assessee had received was a residential flat of the value of Rs. 5,32,855 and Rs. 4 lakhs in cash as a result of the agreement entered into with the builder.
Facts of the Case
The Appellant, Smt. Raj Dulari Bhasin, aged about 94 years, who is having no regular source of income, was an owner of a house property. The land on which the property in question was located, had been acquired by her on 18th March 1958 for a sale consideration of Rs. 5,500. The land was purchased and the house so constructed was for self use and had been continued to be under her occupation for more than 30 years. The Assessee entered into an agreement dated 1st April 1989 with M/s. Mac Consolidation (the builder) for construction of additional area on the property in question. It was specified that the construction charges for the residential building having area of approx. 9,900 sq.ft. @ Rs. 350 per sq.ft. was agreed at Rs. 34,65,000, which would be incurred by the contractor. A deed of general power of attorney was executed by the Assessee in favour of the builder on 1st April 1989. The net result of the above agreement was that the entire pre-determined cost of construction was to be incurred by the builder and the Assessee was to be provided with a flat on the rear of the second floor at a pre-determined cost of Rs. 5,32,855. The Assessee was also entitled to the share of the profit on the sale of the flats.
The Assessee filed her return of income for the AY in question on 11th October 1990 declaring a profit of Rs. 4 lakhs under the head ‘long term gain’ and claimed deduction of Rs. 3,75,000 under Section 54B. The Assessee also declared net taxable income of Rs. 7,500 under the head ‘capital gains’. The said return of the Assessee was accepted by the Revenue under Section 143 (1) (a). However, on 27th January 1997, after over six years, notice under Section 148 was sent by the AO to the Assessee asking her to file a return of income for the AY in question inasmuch as he alleged to have reason to believe that the income of the Assessee has escaped assessment.
The AO passed an assessment order under Section 147/143(3) on 5th March, 1999 in which the amount received by the Assessee was treated as business income. The AO computed the profit from the sale of the flats as Rs. 4,00,000 and then observed that if the cost of the flat on the second floor (retrained by the Assessee) was reduced from the cost of construction shown at Rs. 35,39,000 then the profit would be more. The AO then observed that “since the Assessee exploited the land owned by her to be used for construction of multi storey building, the activity undertaken is in the nature of trade and accordingly, the profit arising in sale of flats is assessable under head ‘profit from business’. The AO proceeded to hold that the deduction under Section 54E was not allowable to the Assessee since the flats were sold within a period 36 months and the profit arising there from was not long term capital gain. The entire sum in the hands of the Assessee i.e. the cost of the flat plus a sum of Rs.4 lakhs = Rs.9,32,855/- was treated as the income of the Assessee under the head profit and gains of business.
Contention of the Assessee
The ld counsel of the assessee placed reliance on the decision of this Court in Shanti Banerjee (decased) by LRs v. Dy. Commissioner of Income Tax (decision dated 17th November 2015 in ITA No. 299 of 2003) where in similar circumstances the Court held that the transaction was not an “adventure in the nature of trade” and the receipt there from was not business income. As regards the plea that the construction took place on the additional portion of land apart from the originally constructed portion, it is pointed out that the entire facts were placed by the Assessee before the AO.
Contention of Revenue
The ld counsel of the revenue contended that the amount constituting the value of the flat together with the share of the profits received by the Assessee was correctly characterized as business income. Alternatively it should be treated as short term capital gains and the tax effect would be the same. He however did not dispute the fact that in computation of income, the cost of the land was not taken into account. He referred to an agreement entered into by the Assessee with one of the flat buyers which showed that what was sold was also a pro-rata 17% of the share in the land. However, for the purpose of computation of taxable income arising from the sale of the flats only the cost of construction was considered.
Held by CIT (A)
The CIT (A) dismissed the appeal of the assessee.
Held by ITAT
ITAT dismissed the appeal of the assessee. It was held that the net result of the whole exercise is that the original property remains intact and the entire new construction gets sold off and the assessee gets a flat in the additional space constructed. In our opinion, it is not possible to treat the sum of Rs.4,00,000 as falling under one head and the sum of Rs. 5,00,000 and odd as falling under a different head as according to us the aggregate amount of Rs. 9,32,885 would have to be treated as income arising from an adventure in the nature of trade/business.
Held by High Court
High court held that merely because the Assessee approached the builder for constructing the flats on the portion apart from the already constructed portion, would not make the transaction an ‘adventure in the nature of trade.’ All that the Assessee had received from the sale of the flats was a residential flat of the value of Rs. 5,32,855 and Rs. 4 lakhs in cash as a result of the agreement entered into with the builder.
Further high court explained in Shanti Banerjee (deceased) by LRs ITA No. 299 of 2003 dated 17th Nov. 2015, after considering the decision in G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594, Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 and CIT v. R.V. Gupta (2002) 258 ITR 261, where the construction and sale of the flats do not change the character of the asset and there was no material to show that the Assessee ever had the intention to exploit the plot as a commercial venture, the transaction cannot be characterized as ‘an adventure in the nature of trade’ leading to the resultant receipt as business income in her hand.
The fact that the Assessee got a flat on the rear second floor apart from the original constructed portion on the ground floor made no difference to the nature of the transaction. Accordingly, the question framed is answered in the negative i.e. in favour of the Assessee and against the Revenue.
Direction to revenue to bear the cost of litigation – The Assessee, an aged lady of 94 years, has had to undergo the ordeal of litigation for more than two decades. In the circumstances, the litigation costs incurred by Assessee must be compensated to some extent at least by the Revenue. A sum of Rs. 50,000 as costs shall be paid to the Assessee by the Revenue.
Accordingly appeal of the assessee allowed.