Excess share of land received on partition cannot be treated as business income

ITO Vs Undavalli Constructions (ITAT Visakhapatnam)

In the instant case there is no dispute that the land in question was purchased as capital asset and remained as capital asset till the partition. No business activity was carried on by the co-owners and the assessee has received the land on partition. The share of land received on partition cannot be treated as income arising from the business. As discussed earlier the asset was shown in the balance sheet as capital asset but not stock in trade. Thus the contention of the assessee that the excess land received in partition was not taxable u/s 28(iv) is also supported by the decisions referred supra.

Subsequent to taking the land on partition, the assessee has sold the property after the development and declared the average sale value of Rs.24488/- per sq.yard which is more than the value adopted by the AO in the assessment. The reason for postponement of taxation was explained by the assessee as disadvantageous location for marketing. The Ld.CIT(A) followed the decision of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries (2013) 358 ITR 295 (SC) and viewed that there was no loss of revenue. Therefore, we agree with the finding of the Ld.CIT(A) that the excess area of land received was not taxable u/s 28(iv) of the Act and there is no loss of revenue. Hence, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. Appeal of the revenue is dismissed.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

This appeal is filed by the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], Rajamahendravaram in ITA No.10253/2016-17dated 23.03.2018 for the Assessment Year (A.Y.) 2014-15 and Cross Objections are filed by the assessee.

2. All the grounds of appeal are related to the deletion of addition made by the Assessing Officer u/s 28(iv) of the Income Tax Act, 1961 (in short ‘Act’). Brief facts of the case are that the assessee is a partnership firm engaged in the business of construction, filed it’s return of income for the A.Y. 2014-15 on 31.07.2014, admitting total income of Rs.’Nil’. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer (AO) found that the assessee has purchased the vacant land admeasuring 10983 sq.yds along with other firm M/s Sai Infra by making equal contribution of investment i.e. Rs.2,39,69,710/- out of the total consideration of Rs.4,30,00,615/- including stamp duty at basic rate of Rs.3641/- per sq.yd. The said land was retained for 34 months and later, both the co-owners have entered into partition deed in Financial Year 2013-14 and the assessee got 8105sq.yds and M/s Sai Infra got 2877 sq.yards towards their share. In partition, the assessee got excess land of 2613 sq.yds than the other coowner. The AO viewed the excess land of 2613 sq.yds, equivalent to the value of Rs.3,19,68,000/- is the benefit received and chargeable to tax u/s 28(iv) of the Act. Accordingly, the AO issued show cause notice calling for explanation of the assessee and the assessee filed explanation stating that it has received the equal value of share of land and did not receive any excess value of land in market value. The assessee further stated that the land received by the assessee was surrounded by slums on both sides, low lying and uneven. The other co-owner got the land surrounded by two sides road in North and West. Therefore, submitted that the share of the land received by the assessee was more or less equivalent to the value of the land taken by another co-owner i.e. M/s Sai Infra Projects which is on the main road side and located advantageously for sale or development. Thus, the assessee argued that there is no extra benefit received by the assessee due to partition, hence, requested to drop the proposed addition. Not being convinced with the explanation of the assessee, the AO made addition of Rs.3,19,68,000/-representing the value of excess land received by the assessee to the extent of 2613 sq.yds valuing the same at Rs.12,000/- per sq.yd as per the SRO and accordingly taxed the sum of Rs.3,19,68,000/- u/s 28(iv) of the Act.

3. Against the order of the AO, the assessee went on appeal before the CIT(A) and argued that the assessee has not received any benefit or perquisite which required to be taxed u/s 28(iv) of the Act. Section 28(iv) applies to the perquisite or the value of benefit received in connection with the business carried on by the assessee and whereas in the instant case, the assessee along with other co-owner have purchased the piece of land which was retained as capital asset and divided the same equally among both the partners as per the market value of the land, thus, there is no benefit either accrued or received by the assessee to attract section 28(iv) of the Act.

3.1. The assessee further stated that the land was purchased as investment and divided between both the co-owners and the value of the land received by the co-owners are more or less equal in monetary terms and there is no provision for taxing the asset received on partition by the co-owner to wards it’s share in the Income Tax Act. The assessee further stated that there is no close relation between the assessee and the other co-owner and both are different entities, having no close relations and hence submitted that the other co-owner also would not agree for parting it’s share.

3.2. The assessee further submitted before the Ld.CIT(A) that the AO intends to tax the extra land @Rs.12,000/- per sq.yd, however, the assessee has subsequently sold the land partly after construction and partly the vacant land and realized the sale proceeds at Rs.24,488 per sq.yd against the value adopted by the AO at Rs. 12000/- and admitted the same as business income / capital gains which is more than the value adopted by the AO, hence, submitted that there is no loss of revenue. In this context, the assessee relied on the decision of CIT Vs. Triveni Engineering Industries Ltd. (2011) 336 ITR 374 (Bom), CIT Vs. Excel Industries (2013) 358 ITR 295 (SC), CIT Vs. Aditya Builders (2015) 378 ITR 75 (Bom), accordingly argued that there is no case for the revenue to tax the land received on partition u/s 28(iv) and no benefit was derived by the assessee. Having considered the submissions of the assessee, the Ld.CIT(A) agreed with the view of the assessee that the assessee did not receive any benefit to be taxed u/s 28(iv) of the Act and also given a finding that having held the land for more than 34 months and offered for taxation of the sale proceeds of the land received by the assessee, there is no loss of revenue. The Ld.CIT(A) relied on the decision of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries (supra) and P.Krishna Menon Vs. CIT (1959) 35 ITR 48(SC), accordingly allowed the appeal of the assessee.

4. Aggrieved by the order of the Ld.CIT(A), the department is in appeal before this Tribunal. During the appeal hearing, the Ld.DR vehemently supported the order of the AO and argued that the assessee had received the excess land towards his share which is taxed rightly u/s 28(iv) of the Act. Though the assessee had stated that the land received was in disadvantageous position and the market value does not exceed the value of the other co-owner’s share, the assessee has not demonstrated this fact with recitals in the partition deed and subsequent sale of land at higher rate also supports contention of the revenue. The assessee deemed to have commenced the business, no sooner the land was purchased and it was purchased with an intention to do business, therefore, argued that the land in question received by the assessee was the business asset, but not capital asset and hence the excess value of land required to be treated as benefit received u/s 28(iv) of the Act. The Ld.DR further argued that the observation of the Ld.CIT(A) that it was only preponement of incidence of taxation is contrary to the provision of the Income Tax Act, when the benefit was already received by the assessee as on the date of partition deed. The Ld.DR further stated that each assessment year is independent, therefore, income is to be computed each year independently, thus the contention of the Ld.CIT(A) that there was no loss of revenue due to postponement of incidence of tax was incorrect and hence requested to set aside the order of the Ld.CIT(A) and allow the appeal of the Revenue.

5. Per contra, the Ld.AR reiterated the submissions made before the Ld.CIT(A) and further submitted that both the parties are not related, and hence, there is no case for giving or taking extra benefit in the partition. The Ld.AR further submitted that there was no material available to the AO to show that the assessee had received excess benefit in the partition in monetary terms. Though the area of land received is more location wise, the market value of both the pieces of land was equal. Taking our attention to site plan in page No.51 of the paper book, the Ld.AR submitted that the other co-owner has received the land in partition which is facing two way road and the assessee has received the site with west and south roads and for the site of 4929 sq.yds, there was no approach road which is uneven and surrendered by the slums. As per section 28(iv), the assessee ought to have received the benefit from the business or exercise of profession. In this case, there was no business activity and both the co-owners have purchased the site and retained the same for 34 months as capital asset and divided the land as per the market value. Though the site received by the other co-owner was 2877sq.yds, it was covered by main roads in North and West and commercially advantageous. Therefore, other co-owner has given the excess share of land to the assessee to compensate the loss and market value of both the sites was more or less equal. Ld.AR argued that in partition, when the co-owners divide the land the same cannot be taxed u/s 28(iv) of the Act. The Ld.AR relied on the decision of Hon’ble High Court of Gujarat in the case of CIT Vs. BharatkumarR.Panchal, 252 ITR 0454 and taking our attention to para No.4 of the Hon’ble High Court’s order, the Ld.AR argued that there is no case for applying the provision of clause(iv) of section 28 of the act, when the assessee received the asset on account of the separation of partnership. The Ld.AR argued that the Ld.CIT(A) rightly relied on the decision of CIT Vs. Excel Industries (2013) 358 ITR 295 (SC) and held that there is no loss of revenue. The Ld.AR taking our attention to para No.8.1 of the assessment order argued that the AO has given a finding that there was no business and intends to disallow the business loss declared by the assessee and when it comes to the issue of the excess land, the AO intends to tax the same as benefit derived during the course of business thus taking contradictory stands in the same year for different issues which is unjustified. Taking our attention to page No.48 of the paper book, the Ld.AR submitted that the proposal for construction of residential apartment was received on 16.12.2013, where as the partition deed was entered on 21.10.2013, i.e. after the land was divided among the co-owners.

The assessee also submitted that the land in question was never shown as business asset and it was shown as capital asset from the date of purchase. The Ld.AR argued that the Ld.CIT(A) has rightly held that the provisions of section 28(iv) are not applicable and no case for taxing the same u/s 28(iv) of the Act and hence, requested to uphold the order of the Ld.CIT(A) and no interference is called for.

6. We have heard both the parties and perused the material placed on record. The AO made the addition in this case, invoking the provisions of section 28(iv) of the Act. Section 28(iv) envisages to tax the benefit or the perquisite arising from the business or exercise of profession. The benefit must accrue or arise in the course of carrying on such business. For the sake of clarity we extract relevant part of 28(iv) of the Act which reads as under :

“Profits and gains of business or profession.

The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession“,—

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;”

6.1. The Ld.CIT(A) has discussed the issue of taxing the sum u/s 28(iv) in detail and held that the extra land received by the assessee on partition does not fall under the benefits received or accrued to the assessee during the course of carrying on the business in para No.10 and 11 which reads as under :

“10. I have perused the submissions of appellant, the information brought on record and the contention of the A.O. Considering the facts of the case in entirety, it appears that the A.O was erroneous in applying the section 28(iv) of the IT Act while making the addition on account of ‘value of benefit arising from the receipt of land’ by the appellant firm during the period of partition of the land under consideration.

Section 28(iv) of the IT Act.1961

1) “The plain reading of Sec.28(iv) makes it clear that section 28 refers to the profits and gains& business or profession.” It sets out the income which are chargeable to income-tax under the head profits and gains of business or profession” and clause (iv) thereto states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. This provision shows conditions precedent for such taxability i.e. (1) that there should be benefits or perquisites; and that (ii) such benefits or perquisites should arise from the business or exercise of the profession. The expression ‘arising from the business’ essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt.

One must bear In mind the fact that section 28 only refers to the ‘income’ which can be charged to income tax under the head ‘profits and gains from business or profession’, and , therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv)

2) One more condition for applicability of section 28(iv) of the Act is that the benefit or perquisite must arise from business or exercise of profession. The phrase ‘arise from business’ in the context of section 28(iv) contemplates not some connection with the business undertaking of the assessee but it envisages that the benefit or perquisite must arise out from actual conduct of the business of the assessee.

In other words, before sub-section (iv) of Sec28 is invoked it is necessary to show and prove the proximate cause or nexus between the alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximate cause must be real, immediate and not illusionary or imaginary. The benefit or perquisite contemplated by Sec.28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business. The benefit or perquisite should be in the nature of trade receipt.

3) The future gain or benefit when actually denied by the assessee, the same certainly will be assessed as business income and only because a transaction now undertaken will bring more commercial gain or benefit to the assessee in future does not entitle to treat the present transaction itself as benefit or perquisite arising from business and bring the value of the said transaction to tax by deeming he same. The future benefits when actually realized, received or accrued to the assessee, depending upon the system of accounting adopted, will certainly be includible in the assessable income of the assessee at that point of time.

11. Coming to the issue whether on the partition of land as a co-owner, arise any benefit or perquisite to the appellant-firm u/s 28(iv) of the Act as opined by the A.0, has to be ensured into. It is known from the foregoing that the assessee is not doing any business activity with the other firm – M/s Sai Infra, made a simple investment as a co-owner in land and got partitioned on 22.11.2013 and the partition was done on unequal shares only to ensure that none of the co-owners is subjected to any loss. Since the assessee-firm is carrying out business in real estate, keeping in view the future development, agreed/accepted to acquire, even though, there are slums abetting the land on west, south and east sides. During the transaction, no cash or benefit or perquisite was received neither by the assessee nor by the other firm, it was only a partition. After holding more than 34 months, part of land was converted as stock-in-trade and sold along with built up space in the form of residential apartments. Balance part of the land was sold as investment and the appellant has offered taxes in the subsequent years, under the head capital gains and hence there is no loss of revenue.”

6.2. During the course of appeal proceedings, the Ld.AR taking our attention to balance sheet, demonstrated that the subject property purchased along with the co-owner remained as capital asset and divided in partition between the co-owners. Both the co-owners have not carried on any business jointly. The said land was converted into stock-in-trade by the assessee after the partition and this fact was established by the assessee as per the sanction order for conversion of land which was obtained on 16.12.2013 from the Commissioner, Municipal Corporation, Eluru. In this regard it is pertinent mention the decision of Hon’ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Bharat Kumar R.Panchal (2001) 252 ITR 0454 ,in para No.4 which reads as under :

“4. Without reference to any case law on the subject, in our considered opinion, on the plain language of cl.(iv) of s.28, the amount received by the assessee as a partner in the erstwhile partnership, on separation of some of the partners, cannot be described as a benefit or perquisite having arisen from the business or the exercise of a profession. The amount has been received by the assessee when four of his partners separated from the erstwhile partnership and shares of erstwhile partners in that firm were divided along with the assets”.

Though the decision was rendered in connection with the partnership firm the same is equally applies to this case, since the capital asset was divided on partition of co-ownership. The coordinate bench of ITAT, Kolakata in Income-tax Officer, Ward 7(3), Kolkata.v.Shreyans Investments (P.) Ltd. [2013] 31 taxmann.com 11 (Kolkata – Trib.)has considered the issue of taxing the capital receipt u/s 28(iv) and given ruling that unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv) of the act . For the sake of clarity we, extract relevant part of the order of the coordinate bench supra as under:

“7. Section 28 sets out the incomes which are chargeable to income-tax under the head ‘Profits and gains of business and profession’, and clause (iv) thereto refers to “the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession”. It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression ‘arising from the business’ essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501/128 Taxman 394, Hon’ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as ‘business income’, and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that section 28 only refers to the “income” which can be charged to income tax under the head “profits and gains from business or profession”, and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). Hon’ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT [1992] 195 ITR 877/62  Taxman 456 observed that, “…we hold that the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income Tax Act.” (Emphasis by underlining supplied by us). This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income Tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers “any capital gains chargeable under section 45”, but right now we are confined to normal connotations of the expression ‘income’. Howsoever liberal or narrow be the interpretation of expression ‘income’, it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression ‘income’. It is also important to bear in mind that, as held by Hon’ble Supreme Court in the case of Dr K George Thomas v. CIT [1985] 156 ITR 412/23 Taxman 46, “the burden is on the revenue to establish that the receipt is of a revenue nature” though “once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish”. It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon’ble Bombay High Court, in the case of Mahindra & Mahindra Ltd. (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon’ble Madras High Court’s judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, “Thus, a combined reading of the above said judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade”. To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits ‘arising from the business’ also indicates that such benefit must be a business receipt, or revenue receipt, in nature.”

6.3. In the instant case there is no dispute that the land in question was purchased as capital asset and remained as capital asset till the partition. No business activity was carried on by the co-owners and the assessee has received the land on partition. The share of land received on partition cannot be treated as income arising from the business. As discussed earlier the asset was shown in the balance sheet as capital asset but not stock in trade. Thus the contention of the assessee that the excess land received in partition was not taxable u/s 28(iv) is also supported by the decisions referred supra.

6.4. Subsequent to taking the land on partition, the assessee has sold the property after the development and declared the average sale value of Rs.24488/- per sq.yard which is more than the value adopted by the AO in the assessment. The reason for postponement of taxation was explained by the assessee as disadvantageous location for marketing. The Ld.CIT(A) followed the decision of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries (2013) 358 ITR 295 (SC) and viewed that there was no loss of revenue. Therefore, we agree with the finding of the Ld.CIT(A) that the excess area of land received was not taxable u/s 28(iv) of the Act and there is no loss of revenue. Hence, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. Appeal of the revenue is dismissed.

7. The assessee filed cross objections. Ground No.1 in cross objections is supporting the order of the Ld.CIT(A). Since the appeal of the revenue is dismissed, cross objection of the assessee becomes infructuous, hence, Ground No.1 is dismissed.

7.1. Ground Nos. 2 to 4 are not pressed by the Ld.AR during the appeal hearing, therefore, Ground Nos. 2 to 4 are dismissed as not pressed.

8. In the result, appeal of the revenue as well as the cross objections of the assessee are dismissed.

Order pronounced in the open court on 18^th August, 2021.