Capital gain on sale of land covered u/s 50C of Income Tax Act is to be assessed separately

DCIT Vs Hanuman Tubewell Co (ITAT Jaipur)

ITAT Jaipur held that capital gain on sale of land as covered under the provisions of section 50C of the Income Tax Act is to be assessed separately.

Facts- Assesse has preferred the present appeal contesting that CIT(A) has erred in taxing capital gain Rs. 2,42,38,984/- from agricultural land as income from capital gain whereas agricultural land sold is not capital asset as per section 2(14)(iii)(b) of the Act and therefore not liable for capital gain under section 45 of the Income Tax Act.

Conclusion- CIT(A) held that In the assessment order, the AO has highlighted that the assessee had shown the receipts in the credit side of P&L a/c as gains from sale of land. Thus from the perusal of the basic details itself it is seen that the stand of the assessee is contradictory and now it is resorting to alternate claim of land being agricultural once the AO excluded its being utilized to set off the business losses in the assessment order.

The DLC of the land was Rs.2,81,89,384/- the same is found duly covered by the provisions of Section 50C and the only relief available is in terms of cost of acquisition and its indexation. If the AO has considered the gains, the asset could not be without any cost. If the cost of Rs.6,06,265/- taken by the assessee as duly indexed to Rs. 13,74,016/- is duly considered as reasonable and is required to be deducted from the DLC rate of Rs.2,81,89,384/- for determination of capital gains in this case. The long term gain comes to Rs.2,68,15,368/-and is being upheld to be assessed separately as done by the AO correctly.

Bench accepted the order of ld. CIT(A).

FULL TEXT OF THE ORDER OF ITAT JAIPUR

Both these appeals are the cross appeals filed against order of the ld. CIT(A)-Kota dated 13-03-2019 for the assessment year 2014-15 wherein the Department as well as Assessee has raised the following grounds of appeal.

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in applying NP rate of 8% as against 11% applied by the AO (which is based upon N.P. rate disclosed by the assessee in past 7 years) without any basis despite accepting application of provisions of section 145(3)?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in allowing relief by way of treating FDR interest as part of business turnover relying on the Hon’ble Rajasthan High Court’s decision in the case of M/s Choudhary & Brothers which is contrary to the facts of the case under consideration?

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting disallowance of interest payment to partners as interest bearing funds were not utilized in purchases of business assets as demonstrated by list of non business assets?

4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in allowing relief on the issue of depreciation of “Matasukh project’s plant and machinery wherefrom no receipts were disclosed or any details of plant and machinery put to use where provided?

ITA No. 866/JP/2019 – Assessee

“1. That on the facts and in the circumstances of the case Ld. CIT(A), Kota has grossly erred in law and facts in confirming net profit @ 8% on the turnover of Rs. 4,53,03,064/- whereas correct turnover of gross receipts is Rs. 3,09,79,582/-+ by sales Rs. 16,72,232/- ( Total Rs. 3,26,51,814/-).

2. That on the facts and in the circumstances of the case Ld. CIT(A), Kota has grossly erred in law and facts in confirming rejection of audited books of accounts maintained in regular course of business and further applying net profit of 8% on contract receipts. Subject to depreciation, interest and remuneration to partners and third party interests was disallowed by him.

Details of Deduction

Kindly refer:- CIT v/s Jain Constriction Co. and others 245 ITR 527 and CIT v/s Bhawanvapath Neverwan (Bohra) and co. (No. 2) 258 ITR 440.

3. That on the facts and in the circumstances of the case the Ld. A.O. as well as ld. CIT(A) have erred both in law and facts in taxing capital gain Rs. 2,42,38,984/- from Ag. Land as income from capital gain whereas Ag. Land sold is not a capital asset as per section 2(14) (iii)(b) of the Act and therefore not liable for capital gain u/s 45 of the Act.

2.1 Apropos Ground Nos. 1 to 4 of the Revenue, the facts as emerges from the order of the ld. CIT(A) are as under:-

I have gone through assessee’s submission and AO’s findings.

………….

As regards Ground no. 2 & 3, it is seen that the assesser is a contractor for Tubewells and Borewells. The case has a history of rejection of books of accounts and estimation of profits. The turnover as per the A.O in this particular year is Rs. 4.53 crores and G.P. shown @ 16.8% was Rs. 76,51,716/-. The N.P. after claiming depreciation, interest to partners & remuneration was negative (-) 1,09,19,607/-. This loss was despite crediting a sum to the P&L a/c for sale receipts of land Rs. 2,48,36,735/- on account of excluding which as long term capital gains, the loss increases to Rs. 3,57,56,342/- The A.O, issued a notice proposing rejection of the books of accounts, highlighting discrepancies like-

-non maintenance of stock register;

-no day to day quantity details;

-some discrepancies pointed out in the Audit report related to debtors & creditors etc. -claim of depreciation on ‘Mata Sukh’ project but no income being shown therefrom. –

-substantial amount of interest bearing borrowed funds utilized towards interest free advances & loans & non-business investment like land, residential building, thus debiting such interest costs to the P&L a/c to reduce profits.

The appellant assessee submitted a detailed response to the show cause an 14.12.2016 mentioning that the maintenance of his books of accounts was consistent over the years. He also submitted answers to specific queries as well as comparative chart of his N.P. for the past 7 years, claiming that despite fall in his turnover substantially for the past 2 years, his N.P. % has actually improved.

The A.O. was however, not satisfied with the explanation and resorting to the provisions of section 145(3), rejected the books of accounts. In view of the discussion made by the A.O. on the explanation given by the appellant in the assessment proceedings, it is clear that although no specific defects were pointed out by the A.O. in the order, however, certain defects could not have been possibly specified ike non maintenance of site material & stock details in the absence of which the A.O. could not have worked out value of stock purchased, consumed & available. Similarly, in the absence of supporting bills/vouchers of expenses, the defects in the same could not have been highlighted. In the appellant’s own case, matters have travelled upto ITAT which has on the facts involved, sometimes accepted & sometimes not accepted the rejection of books, but has consistently held that net profit rate of 8% is found reasonable in the assessee’s case, however the same would be subject to interest & remuneration to partners & depreciation as well.

The dispute firstly pertains to the turnover and N.P. rate taken by the A.O. 11%. In this regard, the A.O. has first excluded the long term gain on sale of land shown at Rs. 2,48,36,735/- and then held that since there were several discrepancies in the details required to be there in support of the accounts, the books of the assessee were not reliable. He has detailed these at para 4 & 5 of his order and included this in the show cause notice dated 08.12.2016. He has in the show cause mentioned that he intends to reject the books u/s 145(3) and estimated the N.P. @8%.

The assessee on his part has responded to the show cause by mentioning that the accounting method is followed consistently for the past 37 years and on other issues also responded to the A.O.’s objections. Even as per the comparative chart for the last 7 years, the N.P. has varied from 7.95% to 11.5%, while in the present year it comes to Rs. 17.54% so the trading results were acceptable.

As regards the issue of non deduction of TDS on loan from HDB Financial Service it was mentioned that since no interest was paid, the question of deduction of TDS did not arise.

As regards the depreciation claimed on the “Matasukh” Project, the agreement was with Govt. of Rajasthan in FY. 2011-12 and investment had been made in the plant & machinery. During the year there was claim of depreciation only on the WDV. The A.O. has considered the response of the assessee but not agreed to the same. However, his denial is at best in general terms on the defects in the books. The non maintenance of stock register & defects in the voucher of expenses, though not detailed in his order as to how these have adversely effected the business results, but do constitute deficiency worth considering for rejection of the books. At the same time, it is also worth mention that the current year’s N.P. 17.54% was arrived at by including the long term gain from sale of land which is Rs. 2.48 crores. This is not a proper accounting methodology as rightly held by the A.O. If the above amount is excluded, then there is a loss of Rs. 3.57 crores. Under the circumstances, I am convinced that the material defects pointed out by the A.O. though slightly general, did affect the book results & were not reflective of the true picture of the profits in the case. Hence, the rejection of the books of accounts u/s 145(3) is being upheld.

Coming to the estimation of profits, it is noteworthy that the business turnover from works contract is Rs. 3,09,79,582/- as claimed by the assessee. However, as regards the other receipts which the A.O. has mentioned as deliberately being included in the trading account, these are as under-

Rs. 16,72,232/-being sales

Rs. 1,26,51,250/- being the W-I-P.

Since the same has not been detailed by the assessee, the A.O. has rightly considered the same for the purposes of the turnover. The total turnover is thus rightly taken by the A.O. at Rs. 4,53,03,064/- Rs. 3,09,79,582+ Rs. 16,72,232 Rs. 1,26,51,250). In addition to the same in view of my finding at Ground no 4 below in this order, I am of the view that since the FDR income is also considered as Business receipt, estimation of 8% profit on the same despite netting the interest payout should be taken on the same. Thus, for calculation of the turnover, the total receipt is taken as Rs. 4,53,03,064/-plus FDR receipt of Rs. 92,58,480/- which totals upto Rs. 5,45,61,544/–

However, the estimation of N.P. 11% is found to be without any basis in the assessment order. Once the profit of the current year under appeal is not under consideration for averaging purposes, the average of the past 6 years N.P. comes to 9% Considering the downward trend in receipts and stalled projects, the show cause notice of the A.O. and the history of the sustained profit of 8% by ITAT in 2011-12 & 3%) applied by the A.O. in A.Y. 2012-13 and 8.78% accepted in AY. 2013-14, am of the view that a N.P. rate of 8% on the total turnover of Rs. 5,45,61,544/-would suffice for the interest of justice in the present year as well. This would come to Rs. 43,64.923/- subject to depreciation & interest to partners.

Since the long term capital gains is to be separately assessed as held in this order while discussing on the issue of rejection of books, the loss is to be reworked by the A.O. after considering the above N.P. subject to the interest & deprecation.

As regards the claim related to depreciation and interest & remuneration to partners, in reference to the profit of business estimated, the depreciation claim from Matasukh Project is based on the opening WDV and was also allowed in the earlier years. The department has neither questioned the claim in the earlier year, no reopened the cases till date if this year’s findings of the AO are to be held as correct. The department cannot allow a claim on the same depreciable assets in one year & then withdraw the same is the next year. The workability or income from an asset is not the necessary criteria laid down. The question in that if these were business assets as allowed after verification of the claim in the earlier year, then how the allowance was deniable in the current year under appeal as it was based on the earlier year’s W.D.V. Hence I consider depreciation as allowable while computing the Net profit as discussed above (8% (subject to depreciation and partners’ interest on Capital).

As regards the interest on partners’ capital, the same is a legitimate business expense and in fact the major disallowance of non business asset made by the A.O is against the Mata Sukh project which as I have discussed above is contradictory to the stand adopted by the department consistently in earlier years. Similarly, the investments made for furtherance of the assessee’s long term business interests cannot be discarded by the A.O on mere presumptions and without bringing on record any specific findings or independent cogent evidences to prove that the investments were non business. The loans and investments are not fresh and have been examined in the earlier years. No. adverse comments are there in the Auditor’s report regarding the same. The partners have also reflected the income from interest in their respective returns and the A.O has not made out a case against the same. TDS has been duly deducted on the interest payments as per the Balance sheet annexures. In fact the opening Capital of Rs. 13.41 crores was sufficient for any interest free advances even if the A.O’s argument is to be accepted. Hence, the disallowance made by the A.O in respect of non business assets reducing the allowable interest on the same by Rs. 1,28,81,163/- on a pro rata basis as per page 11 of the order and allowing claim of Rs. 34,73,327/- is not being upheld. Thus the allowable deductions against the profit worked out at Rs. 43,64,923/- would be Rs. 2,37,13,548/- on account of Depreciation (Rs.73,59,058/- and Interest to partners Rs. 1,63,54,490/-) which means an overall business loss of Rs. (-)) 1,93,48,625/-

These grounds of appeal are partly allowed.

As regards Ground no. 4, related to interest from FDR being Rs. 92, 58,480/- recently the HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR in D.B. Income Tax Appeal No. 355/2017 in the case of M/s Choudhary And Brothers, Village Ladana Phagi, Jaipur Versus Deputy Commissioner of Income Tax, Circle Jaipur Raj. has held that we find that appellant being a civil contractor was required to provide a performance guarantee to the various works departments for obtaining contracts of civil construction. He to keep such performance guarantee alive by way of utilizing the bank overdraft limit against which he had to furnish FDRs/NSC for execution of the contracts. His failure to submit the performance guarantee or inability to keep them alive would have resulted in termination of the contract awarded to him and in that event, the concerned departments/employer could encash the security. Release of such performance guarantee is dependent on fulfillment of certain conditions. It is not that the appellant had invested surplus money lying idle with him only in FDRs/NSCs with a view to earning interest. Obtaining of FDRs/NSCs and furnishing of the same against the performance guarantee by the appellant, therefore, had an inextricable nexus with his business of securing civilcontracts and integral to his working as civil contractor. The income of interest earned from the interest such FDRs/ NSCs by the appellant therefore, in our considered new, cannot be treated as income from other sources and would rather be an income earned from business.

In view of above discussion, the question of law extracted above is answered in the terms that “in the facts and circumstances of the case, the interest income from FDRs and NSCs of the petitioner has to be treated as income from business and not income from other sources as the income is part of the total receipts and not from other sources.” In the result, the appeals are allowed. The judgement of the ITAT dated 24.7.2017 is set aside and that of the CITA) in regard to interest earned on FDRs and NSCs dated 18.3.2016 is restored and the matter is remitted back to the Assessing Officer for passing fresh order of assessment in accordance with law keeping view the question answered by this Court.

Thus following the above precedent of the jurisdictional High Court on the facts found similar in the present case as well, I am of the view that the income from FDR interest is income earned from business. The same is to be considered in the turnover of the business for the calculation of Net Profit as per the above working in Grounds 2 & 3 above.

This Ground of appeal is allowed.”

2.2 During the course of hearing, the ld. DR supported the order of the AO as to the grounds raised hereinabove and submitted that the ld. CIT(A) has erred in allowing relief to the assessee.

2.3 On the other hand, the ld. AR of the assessee has supported the order of the ld. CIT(A).

2.4 We have heard both the parties and perused the materials available on record. The Bench has taken into consideration the grounds raised by the Revenue in which it is observed that the ld. CIT(A) has elaborately discussed the respective grounds with logical consideration and it is not imperative to repeat the facts of the case of the assessee which itself does not leave any room to adjudicate upon afresh since the Revenue was not able to controvert the findings as recorded by the ld.CIT(A) in his order. It is also pertinent to mention that no written submission has been filed by the Revenue pertaining to the grounds raised (supra). In this situation, we find no reason to interfere with the order of the ld. CIT(A) and the same stands upheld. Thus the appeal of the Revenue is dismissed.

3.1 Now we take up the appeal of the assessee for adjudication in ITA No. 866/JP/2019 for the assessment year 2014-15.

3.2 As regards the ground No. 1 and 2 of the assessee, it is pertinent to mention that while hearing both the parties and perusing the materials available on record, the Bench has confirmed the action of the ld. CIT(A) with regard to the appeal of the Revenue. Hence, the same decision will also apply in the case of the assessee as no afresh arguments as to the case was advanced by the ld. AR of the assessee. Hence, Ground No. 1 and 2 of the assessee are dismissed.

3.3 As regards Ground No.3 wherein the assessee is aggrieved that the ld. CIT(A) has erred both in law facts in taxing capital gains Rs.2,42,68,984/- from Agricultural land as income from Capital gain whereas the Agricultural land is not a capital asset as per section 2(14)(iii)(b) of the Act and, therefore, not liable for capital gain u/s 45 of the Act. However, the ld.CIT(A) has partly ground of the assessee by observing as under:-

‘’As regards the Ground of appeal No. 5 & 6 related to capital gains income, the ground is taken now that since this was an agricultural land within the definition given u/s 2(14)(iii)(b) of the I.T. Act, the gains should not have been separately taxed u/s 45 and subjected to provisions of Section 50C.

In the assessment order, the AO has highlighted that the assessee had shown the receipts in the credit side of P&L a/c as gains from sale of land. Thus from the perusal of the basic details itself it is seen that the stand of the assessee is contradictory and now it is resorting to alternate claim of land being agricultural once the AO excluded its being utilized to set off the business losses in the assessment order

The DLC of the land was Rs.2,81,89,384/- the same is found duly covered by the provisions of Section 50C and the only relief available is in terms of cost of acquisition and its indexation. If the AO has considered the gains, the asset could not be without any cost. If the cost of Rs.6,06,265/- taken by the assessee as duly indexed to Rs. 13,74,016/- is duly considered as reasonable and is required to be deducted from the DLC rate of Rs.2,81,89,384/- for determination of capital gains in this case. The long term gain comes to Rs.2,68,15,368/-and is being upheld to be assessed separately as done by the AO correctly.

3.4 During the course of hearing, the Bench noted that the ld.AR could not controvert the findings of the ld. CIT(A) and no contrary material has been advanced.

3.5 On the other hand, the ld. DR supported the order of the ld. CIT(A)

3.6 After hearing both the parties and perusing the materials available on record, the Bench finds that for want of no contrary material by the assessee, the Bench has no option except to confirm the order of the ld. CIT(A) on the issue in question. Hence, the Ground No. 3 of the assessee is dismissed.

4.0 In the result, the appeal of the Revenue as well as assessee are dismissed.

Order pronounced in the open Court on 13 /02/2023.