Section 263 Order unsustainable as AO allowed claim after due application of mind

ETA Star Infopark Vs PCIT (ITAT Bangalore)

ITAT Bangalore held that AO allowed the claim of assessee after due application of mind and on proper consideration of the material available on record. Therefore, the order of Ld. CIT passed u/s 263 of the Act cannot be sustained.

Facts- Prior to issuing the aforesaid notice u/s 133C of the Act, the learned Income Tax Officer had telephonically called the appellant to furnish copies of the Joint Development Agreement, relevant Power of Attorneys executed in favour of the Developer and also copies of Partnership Deed for his verification and in response to the same, the appellant had submitted all such documents.

AO, after finding that the appellant has not done any business activity and nor earned any income from business during the A.Y.2015-16, the AO had sought the approval of the Principal Commissioner of Income-tax to convert the limited scrutiny into complete scrutiny for disallowing the general and establishment expenses claimed as deduction by the appellant in the Return.

The learned Pr.CIT, after examining the records of the appellant and found that the appellant had neither carried out any business activities and nor earned any income from business, accorded approval to convert the assessment proceedings into complete scrutiny, for disallowing the general and administrative expenses claimed by the appellant as a deduction in the return.

Conclusion- Hon’ble Karnataka High Court in the case of CIT Vs. Cyber Park Development & Construction Ltd. (276 Taxmann 460), wherein held that when the AO allowed the claim of assessee after due application of mind and on proper consideration of the material available on record, the order passed by AO can neither said to be erroneous nor prejudicial to the interests of revenue. Therefore, the order of Ld. CIT passed u/s 263 of the Act cannot be sustained.

Held that considering the totality of the facts and circumstances of the case, in our opinion, there was proper examination of the issue disputed by Ld. PCIT by AO at the stage of assessment and the Ld. PCIT cannot find fault with the action of the AO in accepting the claim of assessee that income arose out of the JDA dated 28.3.2011 to be treated as business income instead of Long term capital gain offered by assessee.

The assessee offered entire revenue received from developer through escrow collection account towards land contribution after deducting nominal land cost for tax as long term capital gain and no proportionate cost for development and construction of flats to the extent of its revenue share is being deducted from the said revenue. Hence, it is a capital gains derived from sale of lands/UDS under JDA.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Per Chandra Poojari, Accountant Member:

ITA Nos.415/Bang/2020 and 248/Bang/2020 are appeals by the assessee directed against the orders of PCIT dated 18.12.2017 and 30.03.2021 for the assessment year 2015-16 and 2016-17 respectively, passed under section 263 of the Income-tax Act,1961 [‘the Act’ for short]. Since the issues in both the appeals are common in nature, these appeals are heard and disposed off together for the sake of convenience. First, we will take up ITA No.415/Bang/2020 for adjudication. The grounds of appeal in ITA No.415/Bang/2020 are as follows:-

1. “The order of the learned Pr. Commissioner of Income Tax, Bangalore passed under section 263 of the Income Tax Act dated 18/03/2020 for Assessment Year 2015-16 in so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant’s case.

2. The learned Pr. Commissioner of Income-tax has grossly erred in revising the order passed by the learned Assessing officer without appreciating that there is no error, much less prejudicial to the interests of the Revenue to warrant a revision and therefore the order passed by the learned Pr. Commissioner of Income Tax is ultra vires to the scope of Section 263 and requires to be cancelled under the facts and circumstances of the Appellant’s case. The direction to make fresh assessment amounts to ordering for making fishing and roving enquiries without any material in support thereof and consequently the impugned order passed is bad in law is liable to be cancelled.

3. The Learned Principal Commissioner of Income Tax ought to have appreciated that regarding the issue relating to long term capital gains the view adopted by the Assessing Officer is one of the possible views and hence the assessment order is not erroneous on the facts and circumstances of the case.

4. The Learned Pr. Commissioner of Income Tax failed to appreciate that the case of the appellant was selected for scrutiny to verify the claim of the appellant regarding examination of Long Term Capital Gains as per the scrutiny notice issued by the Assessing Officer and consequently erred in holding that the Assessing Officer has not examined the activity of the appellant on the facts and circumstances of the case.

5. The learned Pr. Commissioner of Income Tax is not justified in exercising revisionary powers under section 263 of the Act as the entire proceeding is without jurisdiction and not in accordance with law on the facts and circumstances of the case.

6. The learned Pr. Commissioner of Income Tax is not justified in law in setting aside assessment order passed u/s 143(3) of the Act by holding that the assessment order is erroneous and prejudicial to the interest of revenue on the facts and circumstances of the case.

7. The learned Pr. Commissioner of Income Tax was not justified in law holding that the income earned by the appellant from the sale of land is taxable under the head income from business instead under the head Income from Capital Gains, on the facts and circumstances of the case of the appellant.

8. The Learned Pr. Commissioner of Income Tax erred in holding that the Assessing Officer has not verified the issue of short term capital gains shown in the computation of income which is not part of the notice issued under Section 263 of the Act and consequently the entire order passed under Section 263 of the Act is bad in law on the facts and circumstances of the case.

9. The learned Pr. Commissioner of Income Tax grossly erred in holding that the activity entered into by the appellant with the Developer is that of an adventure in the nature of trade on the facts and circumstances of the case.

10. Learned Pr. Commissioner of Income Tax erred in invoking clause (a) to Explanation – 2 to Section 263 of the Act for passing order under Section 263 of the Act which was not put in the notice under Section 263 of the Act and consequently the order u/ s 263 of the Act is in violation of the principles of natural justice.

11. The learned Pr. Commissioner of Income-tax failed to consider the entire objections dated 10/03/2020, notice issued under Section 263 of the Act and the decisions relied by the appellant in its submissions on the facts and circumstances of the case.

12. The Learned Pr. Commissioner erred in directing the Assessing Officer to consider the income offered under -the head Long Term Capital Gains as business income on the facts and circumstances of the case.

13. The learned Pr. Commissioner of Income-tax erred in holding that twin conditions contemplated in section 263 of the Act are satisfied in the present case on the facts and circumstances of the case.

14. The appellant craves leave of this Hon’ble Tribunal, to add, alter, delete, amend, or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing.

15. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.”

Legal grounds: Findings:-

2. Ground Nos.1 to 6, 10, 11 & 13 are relating to validity of exercise of jurisdiction by Ld. Principal CIT u/s 263 of the Act. Hence, these grounds are clubbed together and adjudicated collectively.

A.R’s Submissions for the A.Y. 2015-16 on legal issue:

2.1 Original Scrutiny Proceedings u/s.143(3) of the Act before the Assessing Officer. Firstly, certain information relating to AYs 2009-10 to 2015-16 (including JDA dated 28-3-2011, ITRs and audited financial statements) were called for u/s 133C of the Act for verification by prescribed authority.

2.2 On filing the Return of Income for A.Y.2015-16 on 02.09.2015, initially, the Income-tax Officer, Ward-1(2)(3), Bangalore vide letter dated 11-2-2016 had called for certain information under provisions of section 133C of the Act. In response to said notice, the appellant vide letter dated 17-2-2016 had furnished copies of ITRs from A.Ys.2009-10 to 2015-16 along with all audited financial statements, etc. for all these Assessment Years, for verification of the prescribed authority u/s.133C of the Act. Prior to issuing the aforesaid notice u/s 133C dated 11-2-2016, the learned Income Tax Officer had telephonically called the appellant to furnish copies of the Joint Development Agreement dated 28-3-2011, relevant Power of Attorneys executed in favour of the Developer and also copies of Partnership Deed for his verification and in response to the same, the appellant had submitted all such documents to him.

2.3 Subsequently, the appellant case was initially selected for limited scrutiny vide notice u/s. 143(2) dated 19-9-2016 to examine the following issues:-

(i) Long-term Capital Gain

(ii) Mismatch in income/capital gain on sale of land or building

2.4 In response to said notice, the appellant vide its letter dated 27-9-2016 submitted copies of ITR, Statement of Total Income, audited Financial Statements, etc. to the learned Assessing Officer.

2.5 During the course of assessment proceedings, the learned AO had called for additional details vide notice u/s 142(1) rws 129 dated 4-8-2017 & 10-11-2017 and had also raised a specific query regarding the details of business carried out by the appellant during AY.2015-16. The appellant vide its reply dated 22-8-2017 informed the AO that “The Assessee does not carry out business activities during the FY ended 31.03.2015. The assessee has returned the long-term capital gains for sale of land and interest on deposits during the relevant previous year.” The learned AO has reproduced this reply of the appellant in para 4.2 of the assessment order dated 18-12­2017.

2.6 The learned AO vide letter dated 10-11-2017 asked the appellant to explain as there is no business activities carried out during the relevant FY 2014-15, for what business purpose the assessee has claimed by way of deduction certain expenses in the return of income? The appellant vide its letter dated 15-11-2017 submitted a detailed reply to the said query. The gist of its reply is reproduced in para 4.4 of the assessment order dated 18-12-2017 by the learned AO.

2.7 When the learned AO, after finding that the appellant has not done any business activity and nor earned any income from business during the A.Y.2015-16, the AO had sought the approval of the then Principal Commissioner of Income-tax-1, Bengaluru (PCIT-1) to convert the limited scrutiny into complete scrutiny for disallowing the general & establishment expenses claimed as deduction by the appellant in the Return.

2.8 The learned Pr.CIT-1, after examining the records of the appellant and finding that the appellant had neither carried out any business activities and nor earned any income from business, accorded his approval to convert the assessment proceedings into complete scrutiny, for disallowing the general & administrative expenses claimed by the appellant as a deduction in the return.

2.9 On verification of the details furnished by the appellant in the course of assessment proceedings, as described above, the learned A.O. had passed the assessment order dated 18-12-2017 accepting the Long term Capital gains and Interest income returned by the appellant. Since the appellant has not had any business activity and no business income earned in AY 2015-16, learned AO had disallowed the expenses claimed by the appellant amounting to Rs.51,74,991/-.

2.10 From the above facts, it is obvious that the Return of Incomes, audited Financial Statements, Joint Development Agreement and other relevant records of the appellant have been verified & scrutinized at following three levels before the assessment order is passed by learned A.O. –

i) first by the prescribed authority u/s.133C of the Act,

ii) secondly by learned Assessing Officer (AO) during scrutiny proceedings u/s.143(3) of the Act, and

iii) thirdly by then learned Pr.CIT-1, while granting approval for converting the limited scrutiny into complete scrutiny on a reference by the learned AO.

2.11 On scrutiny of the records of the appellant, all the above mentioned Authorities have found that the income received from the JDA by the appellant as a Landowner pursuant to JDA terms, is long­term capital gains taxable u/s.45(1) of the Act. On completion of scrutiny proceedings, the learned AO has accepted the LTCG returned by the appellant for A.Y.2015-16. As mentioned in the assessment order dated 18-12-2017, during scrutiny proceedings, five hearings were taken place, i.e. on 19/09/2016, 4/8/2017, 14/8/2017 and 11/10/2017. In the course of assessment proceedings, the learned AO and on a reference, the then learned Pr.CIT-1 have found that the appellant had not carried out any business activities and not earned any income from business during A.Y.2015-16. As such, in the absence of income from business, the learned A.O. had disallowed the general & establishment expenses of Rs.51,74,991/- claimed by the appellant as deduction in the ITR, relying the concept on “matching principle” followed in Accounting Standards.

2.12. It was submitted by Ld. A.R. that as explained herein above, during the course of assessment proceedings, the learned A.O. has made detailed inquiries and ascertained the details of business activities carried out by the appellant during AY 2015-16. The learned AO has found that the appellant has not done any business activity and not derived any income from business during the year. Hence, the learned AO has accepted the Long-term Capital gains and interest income, as returned by the appellant and disallowed the general & establishment expenses due to NIL business income and no business activity.

2.13 According to Ld. A.R., the learned AO being conscious and well aware of the nature of business of the appellant has stated in the assessment order dated 18.12.2017 (at Sr. No.10 of page-1) as “Income from capital gains” The learned A.O. having gone through the records and satisfied that income from Capital gains returned by the appellant was accepted without any additions or deletions under the jurisdictions and guidance of the higher authorities.

2.14 In the Assessment Order, the following observations made by the learned AO corroborates the fact that the learned A.O. had scrutinized the records of the appellant comprehensively in arriving at a conclusion that the appellant has neither carried out any business activities nor earned any income from business during the A.Y.2015-16:-

i) At Sl. 10 of Page-1 of the assessment order, the “Nature of Business” has been mentioned as “Income from Capital Gains.”

 ii) In para 4.1 “4.1 After perusal of the submitted documents, it is observed that the assesse has “NIL” business income during F.Y.2015-2016. However, the assesse is claiming the following expenditures:

ii) In para 4.5 “5 After going through the submissions, the assessee has placed reliance on Madras High Court case CIT vs Electron India (241 ITR 166). In the referred case, the assessee is a manufacturing concern engaged in the manufacturing of cadmium sulphide sale. However, there were no sales during the year. However, in the present case, the assessee firm is engaged in the business of real estate development and there is no business activity performed during the relevant previous year. Hence the case law relied by the assessee firm cannot be applicable in the present case.”

iv) In Para-5.2 “5.2 During the scrutiny proceedings, it is noticed that the assessee is showing NIL income in his P&L Account for A.Y.2015-2016. It was also noticed that the assessee is claiming business expenses to the extent of Rs.51,74,991/-. In the absence of any business activity, the same may be added back to the total income of the assessee. Since none of the CASS reason is about business expenses, a proposal was sent to Pr.CIT-1, Bengaluru on 4­12-2017 to convert scrutiny assessment from limited to complete. The revenue potential is above Rs.10 Lakhs, as prescribed vide CBDT instruction No.7/2014 dated 26/09/2014. The approval for the same was accorded by Pr.CIT-1, Bengaluru vide letter dated 8/12/2017 received in this office on 13/12/2017.”

v) “6. Conclusion

6.1. Under the provisions of section 37(1) any expenditure laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head “Profits and Gains of Business or Profession.” As there is no corresponding business income during the relevant financial year 2014-15, the business expenses claimed by the assessee in his return filed for A.Y.2015-16 is not allowable as per provisions of section 37(1) of the Income-taxAct,1961.”

2.15 According to Ld. A.R., the observations and findings given in the assessment order cogently establishes the fact that the learned AO has conducted a detailed inquiry on the nature of business activities undertaken by the appellant during AY 2015-16 and applied her mind in reaching a conclusion that the appellant has not done any business activity & not derived any income from business. The learned AO on perusal all the records and being satisfied with the submissions of the appellant, has accepted long-term capital gains & interest income declared by the appellant in the Return & disallowed the general & establishment expenses claimed by the appellant.

2.16. The appellant wish to submit that the present learned Pr.CIT-1 cannot review the same records for A.Y. 2015-16, once already examined by his learned predecessor of same rank on merits while granting approval for converting limited into complete scrutiny. The then learned Pr.CIT-1 had concurred with findings of the AO that the appellant had not carried out any business activity and had not earned any income from business during AY 2015-16. In the Instructions No.20/2015 dated 29-12-2015 issued by CBDT in para-3 it is mentioned that –

“However, such an approval shall be accorded by the Pr.CIT/CIT in writing after being satisfied about merits of the issue(s) necessitating “Complete Scrutiny” in that particular case. Such Case shall be monitored by the Range Head concerned.”

2.17. From the above CBDT Instructions, it can be inferred that before granting the approval for converting limited into complete scrutiny, the then Pr.CIT-1, Bengaluru has applied his mind and satisfied on merits of the issue (i.e the appellant has neither carried out any business activity and nor earned any income from business) after going through entire records of the appellant for A.Y.2015-16.

2.18.The appellant places reliance on the decision of the Hon’ble High Court of Karnataka in the case of CIT vs Smt. Annapoornamma Chandrashekar reported in (2012) 204 Taxman 158.

2.19. According to Ld. A.R, it was only change of opinion, the Ld. PCIT invoked the provisions of section 263 of the Act and he cannot take a different view from that of his predecessor of same rank and conclude that the appellant has done business activity by signing JDA dated 28-3-2011 with a Developer and proposing to receive sale proceed on year-to-year basis, make the activity of the appellant as an adventure in the nature of trade.

2.20. He submitted that on going through the facts of the appellant case, it emerges that the learned AO has done proper inquiry on the nature of activities carried out by the appellant during A.Y.2015-16 and hence the learned Pr. CIT’s view that AO has passed the assessment order without making inquiries or verification which should have been made is incorrect.

2.21. The learned Pr. CIT did not demonstrate how the Assessing Officer, without making inquiries and verification, who is in the custody and possession of all the records including that of JDA, Statement of Accounts, Books of Accounts, Financial Statements, other documents including submissions made in the course of scrutiny proceedings, has accepted & taxed the income from JDA as LTCG. It is not in dispute that such records are in possession at the time of examination by the then learned Pr. CIT as well as the Assessing Officer, besides the investigating officers. It is submitted that the documents and records in the custody of the Revenue are consequent to inquiry by the Revenue and hence, the present learned Pr. CIT erred in concluding that the learned AO has passed the assessment order without making enquiries or verification.

2.22 It is submitted that the learned Pr. CIT did not pass speaking order after considering all the submissions made by the appellant giving due weightage to the facts, circumstances of the case. In the revision order, the learned Pr. CIT has failed to consider the entire objections given by the appellant in its reply dated 10-03-2020 against treating the income received by the appellant from JDA (as per its terms) on account of sale of Undivided share of Land, under heading “Income from Business & Profession” instead of LTCG. The learned Pr. CIT did not even consider the various decisions of Hon’ble Supreme Court, jurisdictional High Court of Karnataka and other High Courts and Hon’ble Tribunal, Bengaluru and other ITATs relied upon by the appellant in its reply dated 10-03-2020 in support of the merits of its case and lack of jurisdiction for invoking revision proceedings under section 263 of the Act. Thus, the learned Pr. CIT has passed the revision order dated 18-3-2020 u/s.263 of the Act summarily without application of mind.

2.23 It is submitted that the observations of the learned Pr. CIT in the revision order that the amendment in section 263 in the form of Explanation-2 (w.e.f.1.6.2015) has widened the scope of power of revision u/s.263 and hence the decisions of Hon’ble SC and HCs cited by the appellant prior to said amendment do not apply in the instant case is based on wrong interpretations of law. The Hon’ble ITAT Benches of Kolkata, Ahmedabad & Delhi in the below mentioned cases, had occasions to examine & interpret the newly added “Explanation-2” to provisions of section 263. Their observations in this regard are as follows:-

i) The Ld. A.R. relied on order of Kolkata bench in the case of Eveready Industries India Ltd. Vs Pr.CIT in ITA No.805/Kol/2019 for A.Y.2014-2015 decided on 13.12.2019 wherein held that:-

“It has to be kept in mind that while the Commissioner is exercising his revisional jurisdiction over the assessment order, he has to exercise his power in an objective manner and not arbitrarily or subjectively since he is discharging quasi judicial powers vested in him while doing so. Thus according to us, Explanation (2) inserted by the Parliament u/s.263 cannot override the main section i.e. section 263(1) of the Act. The learned CIT can exercise his revisional jurisdiction in the event the assessment order is erroneous as well as prejudicial to the interest of the Revenue as discussed above & not otherwise.”

ii) The Ld. A.R. also relied on the order of Tribunal, Ahmedabad in case of Torrent Pharmaceuticals Ltd. Vs DCIT in ITA No.164/Ahd/2018 for A.Y.2014-2015 decided on 8-8- 2018.

2.24 Thus, he submitted that the findings of learned Pr. CIT that the A.O. has not done proper inquiry and hence assessment order is erroneous pursuant to sub-clause (a) to Explanation-2 to Section 263(1) of the Act is based on unfounded grounds and untenable. The learned Pr. CIT having failed to establish that the order of the A.O. is erroneous, the revision order dated 18-3-2020 u/s.263 of the Act is not valid in law.

2.25 The Ld. A.R. submitted that the observations and findings given by the learned Pr.CIT-1 in the revision order amounts to change of opinion which is outside the ambit of an erroneous order. It is submitted that change of opinion to tax is much larger and broader in nature than the scope of erroneous order which is limited in its scope. For change of opinion, there are more than two opinions or treatment and interpretations possible, but in the case of erroneous order, there is no scope for discretion and interpretation. In the appellant case, on examination/ verification of records and other details submitted by the appellant during scrutiny proceedings, the learned AO has concluded that the income received from JDA being a Landowner is taxable under heading LTCG. However, just because the findings as arrived by the learned AO is at a variation of the opinion of the learned Pr. CIT, would not grant the learned Pr. CIT the powers of revision u/s 263 of the Act.

2.26 According to Ld. A.R,, the reliance placed by Ld. PCIT on the judgement in the case of M/s Daniel Merchants Pvt. Ltd. vs ITO dated 29-11-2017 is not applicable to facts of the case. This judgement relates to a case wherein order passed u/s 263 of the Act was confirmed by Hon’ble Kolkata High Court against which SLP was filed and dismissed by Hon’ble Supreme Court. In that case Hon’ble High Court confirmed the revision order of learned Pr. CIT for conducting of detailed verification on raising of bogus share capital by the Companies through the device of money laundering and hence it is not applicable on the facts and circumstances of the present case and the same is distinguishable on facts.

2.27  It is submitted that it is a well settled principle that if the learned Assessing officer has taken one of the possible views i.e. the income received on the JDA by the assessee is taxable under long term capital gains which is permissible in law, then the learned Pr. CIT cannot subscribe or impose a different view and treat the assessment order as erroneous prejudicial to the interests of the revenue. At the time of passing the assessment order dated 18.12.2017. He relied on following case laws wherein it was held that income received from JDA by a Landowner towards contribution of Land or sale of land after development is capital gains and not income from business arising from adventure in the nature of trade:-

(i) CIT v. Razia Sulaiman, ITA No. 412 of 2007 dated 19.09.2011 (Karn. HC)

(ii) CIT vs Smt. Suparna Mahesh ITA No.3232 of 2005 dated 8-2-2011 (Karn.HC)

(iii) CIT v. M/s. Bagmane Developers, Bangalore, ITA No. 157 of 2011 dated 03.11.2016 (Karn HC)

(iv) Bangalore ITAT in case of M/s. Thirumala Venkateshwara Estates and Agencies, Bangalore in ITA No.553/Bang/2010 – Dated 28­10-2010.

(v) CIT v. M/s. Rungta Properties Pvt. Ltd. (2018) 403 ITR 234 (Calcutta)

(vi) CIT v. Kasturi Estates Pvt. Ltd., 62 ITR 578 (Mad)

(vii) CIT vs MLM Mahalingam Chettiar (1977) 107 ITR 236 (Mad)

(viii) CIT vs Suresh Chand Goyal (2008) 298 ITR 277 (MP)

(ix) Income Tax officer v. Sitaram Chamaria (2006) 6 SOT 594 (Mumbai-Trib.)

2.28. The Ld. A.R. submitted that it is a well settled principle of law that in order to invoke the provisions of section 263 of the I.T. Act, 1961, the learned Pr. CIT shall ascertain from the records that twin conditions embedded in said provision i.e, the assessment order of the learned AO is erroneous and it is prejudicial to the interest of the revenue are to be satisfied cumulatively. In the appellant’s case, the learned AO has passed the assessment order after making adequate inquiry and after having examined the replies of the appellant with due application of mind and hence it is not the case where no inquiry was made. Therefore, appellant’s case cannot be treated as a case of “no inquiry”. From the facts of the appellant’s case as explained herein above, the first conditions regarding the term “erroneous” has not been satisfied. The findings given by the learned Pr. CIT in the revision order tantamount to change of opinion which is outside the ambit of erroneous order. An assessment order should not be subject to revision u/s.263 of the Act merely because another view is possible on the issue decided by the AO.

2.29. The Ld. A.R. placed reliance on the judgement of Hon’ble Supreme Court in case of Malabar Industrial Company Ltd. vs CIT – 243 ITR 83 (SC) has laid down the following legal positions on exercising powers under section 263 of the Act by a Commissioner of Income-tax.

“The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of assessing officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income Tax Officer is unsustainable in law.”

2.30 He also relied on the judgement of the Hon’ble Supreme Court in the case of CIT vs Max India Ltd (2007) 295 ITR 282 (SC), wherein referring its decision in case of The Malabar Industrial Co. Ltd. vs CIT (supra) and also by the judgement of the Calcutta High Court in the case of Russell Properties Pvt. Ltd. vs Addl.CIT, reiterated that –

“when the Assessing Officer takes one of the two views permissible in law and which the Commissioner does not agree with and which results in a loss of revenue, it cannot be treated as erroneous order prejudicial to the interest of the revenue, unless the view taken by the Assessing Officer is completely unsustainable in law.”

2.31. He also placed reliance on following case laws:-

(i) CIT vs M/s. Chemsworth Pvt. Ltd. in ITA No.423 of 2013 – Judgement dated 16.9.2020

(ii) CIT vs M/s. Aztec Software Technology Ltd. in ITA No.348 of 2013 – Judgement dated 16.9.2020

(iii) CIT v. Saravana Developers (2016) 387 ITR 239 (Karn), wherein held that

From close scrutiny of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction u/s 263 of the Act, firstly, the order of the Assessing Officer is erroneous and secondly, that it is prejudicial to the interest of the Revenue on account of error in the order of assessment.

• The Hon’ble High Court cited the principles laid down by the Hon’ble Supreme Court in the case of Malabar Industrial Company vs CIT 243 ITR 83 on satisfaction of twin conditions and difference of views between the Assessing Officer and CIT, when two views are possible, cannot be treated as erroneous order prejudicial to the interest of the revenue. The Hon’ble High Court also referred to the decisions of Hon’ble Supreme Court in “CIT VS Max India Ltd.” 295 ITR 282(SC) and recently in “Ultratech Cement Ltd and Others vs State of Rajasthan & Others (Civil Appeal No.2773/2020 decided on 17.7.2020 – on exercise of revision of previous order under an Act enacted by State of Rajasthan) wherein the Hon’ble Supreme Court has reiterated the above well settled legal principles laid down in case of Malabar Industrial Company Ltd.
• The Hon’ble High Court held that when the Assessing Officer has taken one of the plausible views in allowing the claim of the assessee, the CIT could not have set aside the order of assessment merely on the ground of inadequacy of enquiry. In view of well settled legal position, mere inadequacy of an enquiry or insufficiency of material on record cannot be a ground to invoke powers under section 263 of the Act..

2.32. The Ld. A.R. relied on the following case laws for the proposition that for invoking revisionary powers u/s 263(1) of the Act, the twin conditions regarding “erroneous and prejudicial to the interest of the revenue” are to be satisfied:-

(i) PCIT vs Bangia Gramin Vikash Bank – Calcutta HC – IA No.GA/1 & 2/2018 – Date of order – 23.11.2021

(ii) CIT vs Gabriel India Ltd – 1993 203 ITR 108 Bom

(iii) CIT vs Nirav Modi – Bombay HC in ITA Nos.117 & 119 of 2014 – Date of judgement – 16-6-2016

(iv) Spectra Shares & Scripts Pvt. Ltd 354 ITR 35 (Andhra Pradesh)(2013)

(v) CIT vs Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi)

(vi) PCIT vs Brahma Centre Development Pvt. Ltd. – Delhi HC in ITA No.116/2021 – Date of order – 5.7.2021

2.33. The appellant apprehends that the learned PCIT has invoked the revision proceedings u/s.263 of the Act based on the audit objections and not on suo-moto discretion. The respondent is put to strict proof that the proceedings are not initiated on the basis of audit objection. The appellant submits that the audit objection cannot be a basis of revision of assessment orders. To support our view, the appellant relies upon the following judicial pronouncements:-

(i) Hon’ble Supreme Court in case of Indian and Eastern Newspaper Society vs CIT (1979) AIR 1960 (SC)

(ii) Hon’ble High Court of Punjab and Haryana in the case of CIT v. Sohana Woollen Mills [2018] 296 ITR 238 (Punjab HC), wherein the Hon’ble High Court has held that –

“Mere audit objection and merely because a different view could be taken, are not enough to say that the order of the Assessing Officer was erroneous or prejudicial to the interest of the revenue. The jurisdiction could be exercised if the Commissioner is satisfied that the basis for exercise of jurisdiction existed.”

“The audit objections under no circumstances can be called as record empowering the Commissioner to exercise jurisdiction under section 263 of the Act. Further it is apparent that the Commissioner has initiated the revision proceedings only on the basis of audit objection. Such exercise of power under section 263 is not tenable in law. Accordingly, the order passed by the Commissioner under section 263 is to be set aside.”

D.R’s submissions:-

3. The Ld. D.R. submitted that there was no enquiry from the end of the AO with regard to head of income whether the income could be treated under the head “capital gain” or under the head “business income” while passing the assessment order. According to the Ld. A.R., the AO required to conduct proper enquiry to come to the correct conclusion whether income offered by assessee is to be taxed under the head “business or income from capital gains”. According to the Ld. A.R. there is no application of mind by AO and thereby incorrect assessment was made, which was erroneous in so far as it is prejudicial to the interest of the revenue, which was clearly mentioned by the Ld. CIT in his order. Further, it was submitted that AO has not examined the activity of the assessee in right perspective that development agreement entered into with the builder and to receive sale proceeds on year to year basis, make the activity as an adventure in the nature of trade. The A.O. in the assessment order has taxed the receipts as long-term capital gain, which make it as erroneous and prejudicial to the interest of revenue within the meaning of explanation 2 of section 263 of the Act. Hence, the notice u/s 263 of the Act issued so as to revise the assessment order passed u/s 143(3) of the Act dated 18.12.2017 in the assessment year 2015-16 and on the same basis assessment order for the assessment year 2016-17 dated 26.12.2018 was revised. Accordingly, he supported the order of Ld. PCIT.

Findings on legal issue for the A.Y. 2015-16:-

4. We have carefully considered the rival submissions in the light of material placed before us and also gone through all the judgments cited by the parties before us. We shall take up the legal issue with reference to the jurisdiction of invoking the provisions of section 263 of the Act by the learned CIT. The scheme of the IT Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., Vs. CIT ( 243 ITR 83 (SC), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interest of the revenue.

4.1 In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of “errors” if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the revenue.

4.2 Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a claim, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry.

4.3 Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon’ble Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC), Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar Industrial Co. Ltd’s case ( 243 ITR 83) (SC).

4.4 In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon’ble Supreme Court as follows:

“Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature o f the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge. ”

4.5 Similar view was earlier taken by the Hon’ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.

4.6 In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases:

(i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it.

(ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

(iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.

4.7 Coming to the facts of the present case, the assessment order for the assessment year 2016-17 has been completed u/s 143(3) of the Act. Before that AO issued notice u/s 133C of the Act on 11.2.2016 calling for information under these provisions. Further, the assessee filed a reply to this notice u/s 133C of the Act on 17.12.2016. At the time of assessment, A.O. issued a notice u/s 143(2) of the Act on 19.9.2016.

4.8 The assessee furnished reply to the notice u/s 143(2) of the Act on 27.9.2016. The A.O. also called for information u/s 142(1) of the Act on 4.8.2017. The assessee furnished the information on 22.8.2017 in response to notice u/s 143(2) of the Act dated 19.9.2016 and also replied to notice u/s 142(2) of the Act issued on 4.8.2017 by AO. On 10.11.2017, the AO further called for information for the assessment year 2015-16. The assessee furnished information to this notice to AO on 15.11.2017. Finally, the assessing officer passed the assessment order on 18.12.2017 for the assessment year 2015-16. The assessee was selected for limited scrutiny for considering following issues:-

1) Long term capital gain

2) Mismatch in income/capital gain on sale of land or building.

4.9 Later the scrutiny was converted into complete scrutiny and after converting into complete scrutiny, the AO observed that assessee claimed business expenditure to the extent of Rs.51,74,991/-. However, there was no corresponding business income offered by assessee in the relevant assessment year, the business expenses claimed by assessee in his return filed for assessment year 2015-16 is not allowable as per the provisions of section 37(1) of the Act. Accordingly, he disallowed a sum of Rs.51,74,991/-.

4.10 Under the provisions of section 263 of the Act, the Ld. PCIT/CIT may call for and examine the record of any proceeding, if he considers that any order passed therein by the AO is erroneous and prejudicial to the interest of revenue. The Ld. PCIT/CIT may after giving the opportunity to the assessee of being heard and after making necessary enquiry as he deems necessary to pass such order thereon as the circumstances of the case justified including order enhancing or modifying the assessment, or cancelling the assessment and directing the fresh assessment. As per section 263 of the Act, Ld. PCIT/CIT can exercise such powers when the following factors exceed:-

1. There should be a proceeding under the Act;

2. No such proceedings; the AO must have the order;

3. PCIT/CIT should consider that order or order so passed is erroneous;

4. PCIT/CIT should consider the order so passed is prejudicial to the interest of revenue.

4.11 As held in the case of Gabril India Ltd. (203 ITR 108) (Bom), that Suo moto revision can be exercised by Ld. PCIT/CIT only on examination of records under this Act if he considers that no order passed therein by the AO is erroneous in so far as it is prejudicial to the interest of revenue. It is not an arbitrary error. It can be exercised that only on fulfilling of requirements laid down u/s 263(1) of the Act. The consideration of the Ld. P/CIT as to whether the order is erroneous in so far as it is prejudicial to the interest of revenue musts be based on material record proceedings called for. If there are no material on record on the basis of which it can be said that the Ld. P/CIT acting in the reasonable manner could have given to such conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Ld. P/CIT cannot initiate proceedings with the view to starting fishing and rooving enquiries, in matters or orders, which are already concluded. Such action will be against the well accepted policy of law that there must be a kind of finality in all legal proceedings, without stale issues should not be reactivated with a particular state and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. The first requirement to exercise the power suo-moto is that the order is erroneous, secondly it should be prejudicial to the interest of revenue. If the order is erroneous but not prejudicial, Ld. CIT cannot exercise the power u/s 263 of the Act. Every erroneous order cannot be subject matter of revision because second requirement must also be fulfilled. There must be prima facie of material on record to show that tax which was lawfully leviable was not imposed or by application of relevant statute on an incorrect interpretation a lesser tax than was just has been imposed. Thus, u/s 263 of the Act, the revisionary power can be exercised only if the order of AO is erroneous and prejudicial to the interest of the revenue. In the absence of any one of the said conditions, the revisionary power cannot be exercised by Ld. P/CIT. Further, Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. CIT has held as under:-

“The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to section 263(1) of the Act.”

4.12 In the present case, as seen from the assessment order, AO examined the issue in dispute in detail by calling various information and observed that assessee not carried on any business in the assessment year under consideration and expenditure claimed by assessee at Rs.51,74,991/- and observed that it cannot be treated as business expenditure u/s 37(1) of the Act and was disallowed and he was of the opinion that assessee returned income from the JDA, wherein the assessee is the land owner for income to be assessed as only long term capital gain and accepted the returned income on this count income is assessment order. The Ld. PCIT now on examination of record cannot hold that there was no enquiry by AO on this subject and given direction to the assessee to treat the income declared by the assessee under the head Income from business instead of long term capital gain as declared by the assessee.

4.13 Further, recently Hon’ble Karnataka High Court in the case of CIT Vs. Cyber Park Development & Construction Ltd. (276 Taxmann 460), wherein held that “When the AO allowed the claim of assessee after due application of mind and on proper consideration of the material available on record, the order passed by AO can neither said to be erroneous nor prejudicial to the interests of revenue. Therefore, the order of Ld. CIT passed u/s 263 of the Act cannot be sustained.”

4.14 Further, in the case of CIT Vs. Anil Kumar Sharma (335 ITR 83), wherein held as under:

“There is a distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter:

Held, dismissing the appeal, that the present case would not be one of “lack of inquiry” even if the inquiry was termed inadequate. The Tribunal found that complete details were filed before the Assessing Officer and that he applied his mind to the relevant material and facts, although such application of mind was not discernible from the assessment order. The Tribunal held that the Commissioner in proceedings under section 263 also had all these details and material available before him, but had not been able to point out defects conclusively in the material, for arriving at a conclusion that particular income had escaped assessment on account of non-application of mind by the Assessing Officer. The Tribunal was right and the order of revision was not valid.”

4.15 In the case of CIT Vs. Sunbeam, Auto Ltd. 332 ITR 167, wherein held as under:

“The Assessing Officer in the assessment order is not required to give a detailed reason in respect of each and every item of deduction, etc. Whether there was application of mind before allowing the expenditure in question has to be seen. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open.

An order cannot be termed erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment it cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. Section 263 does not visualize a case of substitution of the judgement of the Commissioner for that of the Income-tax Officer who passed the order unless the decision is held to be erroneous. Where the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion such a conclusion cannot be found to be erroneous simply because the Commissioner does not fees satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.”

4.16 In the case of CIT Vs. Saravana Developers (2016) 387 ITR 239 (Karn) wherein held that:-

“Held , that the Commissioner had proceeded to initiate proceedings under section 263 of the Act only on the ground that the Assessing Officer had not assigned any reasons for accepting the valuation of the work-in-progress declared by the assessee. In accordance with the materials placed before the Tribunal in the records pertaining to the assessment year in question, a detailed examination was made by the Tribunal and the Tribunal was of the view that the Assessing Officer had applied his mind before accepting the figure declared by the assessee in the work-in-progress report. Such an order could not be held to be erroneous and prejudicial to the interests of the revenue. It was not a case of “lack of inquiry”. Further inquiry ordered by the Commissioner would amount to a fishing inquiry in the matter already concluded. The profit declared by the assessee worked out to more than 8 per cent. That was normally adopted and accepted by the Department. However, in the computation of work-in-progress made by the Appellate Commissioner, the profit margin worked out to more than 31.8 per cent, which was practicably not acceptable. Accordingly, on this count also, the order passed by the Commissioner was untenable. The Tribunal was right in setting aside the order of revision.”

4.17 In the case of Spectra Shares and Scripts Pvt. Ltd. Vs. CIT (2013) 354 ITR 35 (AP) wherein held that:-

“That the Assessing officer passed the assessment order accepting the case of the assessee that its income had to be taxed under the head “Capital gains” as he was satisfied with the explanation and data submitted by the assessee that it is an investment company on business in shares and such investment was made for the sole purpose of deriving dividend income. The Assessing Officer while making an assessment had examined the accounts, made enquiries, applied his mind to the facts and circumstances of the case and determined the income of the assessee. Thus, it was not open to the CIT, on the ground that a different view is possible, to revise the assessment on the ground that the A.O. did not make an elaborate discussion in that regard.”

4.18 In view of the above discussion, considering the totality of the facts and circumstances of the case, in our opinion, there was proper examination of the issue disputed by Ld. PCIT by AO at the stage of assessment and the Ld. PCIT cannot find fault with the action of the AO in accepting the claim of assessee that income arose out of the JDA dated 28.3.2011 to be treated as business income instead of Long term capital gain offered by assessee.

Ground Nos.7, 8, 9 & 12 on merit of the additions suggested by Ld. PCIT:-

5. The learned PCIT in his order u/s.263 of the Act dated 18-3-2020 in para no.4.2 has concluded that the assessment order u/s.143(3) dated 18-12-2017 is erroneous and prejudicial to the interest of the revenue and the order requires to be revised in terms of section 263 of the Act. Accordingly, the learned PCIT has set aside the assessment order & directed the AO to tax the “profit” earned by the appellant from the Joint Development Agreement dated 28-3-2011 as an adventure in the nature of trade. To corroborate his conclusions and decisions, the learned Pr.CIT-1 has spelt out certain observations on JDA dated 28-3-2011 given in paras 2.1.1 to 2.1.4 of the revision order.

5.1 The Ld. A.R. submitted that it is not at all engaged in the business of real estate development by itself and not involved in real estate business activities. The appellant is an investment Firm engaged in making investment in properties and shares of the Companies in the Group and holding the said investments on long­term basis to derive capital appreciation. The appellant was not holding any Land/ property except Binny pet Land contributed under JDA. Till date, the appellant has neither carried out any business activities including any real estate business, nor earned any income from business. The appellant has derived income from capital gains under JDA dated 28-3-2011, Capital gain from sale of shares of a group company and interest income from Deposits with Banks. Therefore, the learned Pr. CIT’s observation that income of Rs.47,42,88,744/- (received from sale of Undivided Share of Land pursuant to terms of JDA dated 28-3-2021) taxed as long-term capital gains by the learned AO instead of “income from business” is incorrect and untenable and the land is always held as a capital asset right from inception.

5.2 The appellant had received the Land at Binny pet (not purchased) from a Partner as capital contribution on capital account and in accordance with the provisions of section 45(3) of the Act the said Land was accounted as Capital Asset at its book value in its Books of Accounts. Every year, in its Balance-sheet, the said Land is shown as Fixed Asset/Capital Work-in-Progress., Initially, the appellant had the plan to set up of an IT-SEZ Park on the said Land but due to financial & other constraints, the appellant had to abandon the said proposal. This is another reason that appellant has accounted the said Land as Capital Asset in its Books of Accounts. He placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT vs M/s. Bagmane Developers, Bangalore (ITA No.157/2011 –c/w ITA No.145/2011, ITA No.146/2011, ITA No.183/2014, ITA No.349/2014 & ITA No.350/2014 – Date of judgment – 3.11.2016), a Software Park project shall be treated as an investment and not as stock-in-trade.

5.3 The Ld. A.R. submitted that the assessee has not done any improvements or any development by itself on the Binny pet Land given under JDA. The appellant held the said Land as capital asset with an intent to derive capitation accretion and later derived income from sale of Undivided Share of Land by entering into a Joint Development Agreement dated 28-3-2011 with a Developer. The Developer is executing the whole project on the said Land in a phased manner during 8 years from its commencement. Hence, the income received by way of such activity is capital gains and cannot be termed as income from business.

5.4 The assessee, being a Landowner has just contributed the said Land for development by the Developer and has neither involved/interfered in the project activities in any manner nor has a right to do so. The Developer has to do the entire development and construction of the project at their own cost and resources. All the activities relating to the project, such as obtaining Plan sanctions and other approvals from various Government Authorities, planning & execution of development & construction of the project, formulating marketing strategies, pricing & sales promotional activities, selling of flats to prospective buyers, collecting receivables from flat buyers as per payment schedules, arranging of funds & other resources for development and construction of project, etc are done by the Developer alone. Except the right to receive agreed revenue share through designated Escrow Bank Accounts towards consideration for Land contribution, the assessee has no role, right, responsibility, accountability, liability in the said Project.

He drew our attention to the JDA dated 28-3-2011 and Power of Attorney dated 30-3-2011 to explain the nature and nomenclature of these documents.

5.5 Thus, the Ld. A.R. listed out the important contents of the said JDA:

i) Towards Land contribution in the JDA, the assessee Firm and Landowner No.2 are entitled to receive the revenue share as & when the Developer realizes sale proceeds from the Flat Buyers in the project and deposits the collections in the designated Escrow Bank Accounts. The appellant is not entitled to any flats/ area share from the said development.

ii) Irrespective of successful completion of the project or sale of agreed saleable area by the Developer during a period of 8 years from the commencement of the project, the JDA cast an obligation upon the Developer for achievement of minimum consideration to the Landowners at the end of 8th year. This minimum consideration is equivalent to 31% of total saleable area available in the project multiplied by minimum average selling rate at Rs.4,800/- per sq.ft. Based on this minimum consideration, a schedule exhibiting year-wise projected entitlement to the Landowners are given in Annexure-IV to the JDA.

iii) Clause-4.1 of the JDA casts upon the obligations of the Developer with regard to development and construction of the Project in detail. As per clause 4.1.d, “the Developer shall ensure that the Project yields revenues to the Landowner as set out in clause 7 below.” In terms of clause 4.1.v, “ Developer shall be liable and responsible to all the third party purchaser during the defect liability period provided in the third party purchaser agreements.” As per clause 4.1.x, “the Developer shall indemnify and keep indemnified the Landowners and save harmless the Landowners, from and against any and all actions, suits, claims, proceedings, costs, damages, judgments, amount paid in settlement and expenses relating to or arising out of – i) any of the representations made and assurances given by the Developer being found to be not correct or untrue or false or misleading; ii) any breach by or of the Developer of the terms and conditions herein; iii) any act, omission or conduct of or by the Developer or their employees or agents ………………………………………………………………….  and iv) contravention of any Law and/or Rules and/or Regulations and/or conditions ”

iv) In clause 7.5 of the JDA, “the Developer gives assurances as to the realization of projected revenues & acknowledges as one of the factors which constitute consideration for the Landowners to enter into JDA.”

v) As per clause 7.6 of JDA, the Landowners have right to review the total of the Net Revenue realized at the end of 3^rd Contract Year, 5^th Contract Year and 7^th Contract Year. In the event of the Revenue realized being less than the Projected Revenue for those years, by a margin of greater than 15% (Projected Revenue Shortfall), the Developer till realization of the Projected Revenue shortfall shall pay an additional compensation on such shortfall @ 12% per annum and such additional compensation shall be paid separately on monthly basis.

vi) Clause-8 of the JDA provides the manner & method of fulfilment of 8^th year obligations by the Developer. Clause 8.2 talks about non-achievement of minimum average selling rate @ Rs.4800/- per sq.ft. at the end of 8^th year and the Developer has to make good of the shortfall in cash to the Landowners.

vii) As per Clause 8.3, if the Developer has not fully developed or sold the agreed saleable area at the end of 8^th year, then the Developer can further develop or sell the saleable area for a period of one year (9^th year) to meet 31% of the balance saleable area exclusively for the Landowners, who shall be entitled to 100% of the Revenue realized from such sale. Even after completion of 9^th year, there is a shortfall in achieving 31% saleable area, then in that event, the Developer has to pay cash to the Landowners for the shortfall in saleable area at the average selling rate during 9th period or minimum average rate @ Rs.4800/- per sq.ft, whichever is higher.

viii) Clause-9 of the JDA speaks about the abandonment of the project. In case the project is abandoned or not commenced within two years period by the Developer due to their inability, the Landowners have a right to terminate the JDA.

5.6 He also drew our attention to the important clause of Power of Attorney for sale of undivided share of Land as below:-

i) to enter into Agreements for Sale of undivided share in the project land with the prospective purchasers.;

ii) after receipt of all sums from third party buyers in respect of undivided share in the land, the Developer is empowered to transfer and convey by way of sale of undivided share in the land and execute necessary Deeds of Sale/Conveyance in favour of the intending purchasers;

iii) to receive consideration, as also advances, earnest money deposits, part payments into the prescribed bank accounts, in regard to the sale of the undivided share in the project land or portions/shares and issue receipts and acknowledgements thereof in terms of the JDA;

iv) to hand over possession of the undivided share in the project land to any of the purchasers/ or person authorized to occupy the constructed area in the building constructed on the project land or any part thereof, only after the occupation certificate is issued by the concerned authority to the completed building/s from time to time;

v) to appear before the Registrar or Sub-Registrar for registration of Conveyance Deeds or other instruments in connection with the above.

5.7 He submitted that from the above terms of JDA & Power of Attorney as enunciated above, it is amply clear that the JDA dated 28­3-2011 entered into by the appellant with the Developer & the receipt of revenue on year to year basis towards Land, is not an adventure in the nature of trade on the facts and circumstances of the appellant’s case. For an adventure in the nature of trade, there have to be certain essential components and features such as risks, rewards, involvement, intention, exploitation, longevity and there have to be a series of activities which are absent in the JDA dated 28-3-2011 and the appellant being Landowner is a silent spectator and has no roles and responsibilities in development and execution of the Project. The appellant is not developing the Land or constructing the apartments but simply assigned the Land to the Developer only to receive a passive income. In the case of passive income, no effort is required to earn passive income and no responsibilities, no obligations, no risks need to be undertaken to earn the passive income. The activity to earn passive income cannot be treated income as that of adventure in the nature of trade. Therefore, it is submitted that the JDA dated 28-3­2011 signed by the appellant in favour of the Developer and receiving agreed revenue share as per terms of JDA do not makes the said activity as an adventure in the nature of trade.

5.8 The Ld. A.R. submitted that the learned Pr. CIT, in para-3.2 (last sentence) of the revision order erred in concluding that appellant is receiving the sale proceeds on year to year basis depending on the profit in the project. The appellant is receiving “Net Revenues”, which is defined in the JDA and not “any Profit in the project” as mentioned by the learned Pr.CIT. The profit or loss arising out of the development and construction, sale and marketing of the apartments are entirely of the Developer and no share in profits belong to the appellant. Once the rights are assigned, the responsibility of the appellant completes and its expectations are only to that of receipt of the “Net Revenue” and the appellant does not venture into the development, construction and sale of the apartment as presumed by the learned Pr.CIT.

5.9 In this context, the Ld. A.R. submitted that Hon’ble Supreme Court in the case of Faqir Chand Gulati vs Uppal Agencies Pvt. Ltd. & Anothers in Civil Appeal No.3302 of 2005 decided on 10.7.2008 and also in case of Bunga Daniel Babu vs M/s. Sri Vasudeva Constructions & Others decided on 22.7.2016, wherein the Hon’ble Supreme Court analysed the nature of Development Agreement or Collaboration Agreement entered into by a Land Owner with a Builder/Developer vis-à-vis the Joint Venture Agreement in detail and held that Development Agreement or Collaboration Agreement signed by a Land Owner with a Builder/Developer are not Joint Venture in nature. The Apex Court observed that “use of words “joint venture” or “collaboration” in the title of an agreement or even in the body of the agreement will not make the transaction a joint venture, if there are no provisions for shared control of interest or enterprise and shared liability for losses. Accordingly, the Apex Court held that the Landowner, who has just contributed Land in a Development Agreement is a consumer & the Builder/Developer is a service provider within the meaning of The Consumer Protection Act, 1986. The Apex Court further observed that in a true joint venture agreement between the Landowner and a Builder or fund provider, the Landowner is a true partner or co-adventure in the venture where the Landowner has a say or control in the construction and participates in the business and management of the joint venture and has a share in the profit/loss of the venture. The Landowner himself is responsible for the construction as a co-adventurer in the venture.

5.10  As observed by the Hon’ble Supreme Court in the above judgements, in the JDA dated 28-3-2011, there are no provisions for shared control of interest or enterprise and shared liability for losses by the appellant. The appellant has no say or control in the development and construction of the project, and it did not participates in the business and management of the project and it has no share in the profit/loss of the venture. The appellant is not responsible for development and construction of the project as a co-adventurer in the venture. Hence, JDA dt. 28.3.2011 entered into by the appellant in favour of the Developer is not a joint venture in nature and as such, the same cannot be regarded as an adventure in the nature of trade by the appellant.

Entering into JDA dated 28.03.2011 with the developer and to receive revenue share on different assessment years does not make the activity as adventure in the nature of trade.

5.11 He submitted that in para-2.1.2 of the revision order, the learned Pr.CIT has stated that “the Agreement signed by the assessee and realization mechanism of revenue noted in the DA clearly shows that the appellant has entered into this agreement for the purpose of business and not earning LTCG. The assessee has agreed to receive 31% revenue share along with other Landowners on year to year basis which makes it an adventure in nature of trade.”

5.12 According to Ld. A.R., the learned PCIT erred in relying on such observations given in para 2.1.2 and no such presumptions can be drawn contrary to the intention and objective of the appellant as set out in the JDA. It is submitted that in terms of clause-7 of the JDA, the appellant is receiving its revenue entitlement towards consideration for its Land contribution under JDA, as and when the collections are deposited by the Flat buyers in the Primary Escrow Bank Collection Accounts and not year to year basis as mentioned by the learned PCIT. But the appellant offers the said income for tax as LTCG in its Return of Income on year to year basis. It is further submitted that Clause -7 of the JDA dated 28-3-2011 lays down the mechanism of receipt of net revenue entitlement which is contingent upon the receipt of collections from the Flat Buyers. If no sale of flats happens and consequently no collection is received from flat buyers in a particular day or month, due to non-achievement of construction milestones by the Developer, the appellant is deprived of its revenue entitlement during such period.

5.13 He submitted that in the instant JDA, the appellant has just contributed the Land only for development by the Developer at their cost and resources. As a consideration for said Land contribution/granting the Development Rights on said Land to the Developer, the appellant and Landowner No.2 has agreed to receive 31% of Net Revenue from the development on deferred basis, instead of lump-sum payment. Since the developer is executing the project in three phases during a period of 8 years and the Flats are under construction, and to ensure transparency in the dealings, the Landowners (appellant) have agreed to receive the consideration towards the Land through an Escrow Bank Collection Accounts opened by the Developer, as & when sale proceeds of the flats are received by the Developer from the flat buyers and this method of receipt of deferred consideration against sale of Land/UDS, has been provided in the JDA

5.14 He drew our attention to the Annexure 4 to JDA, Estimated Cash Flows to ETA (Landowners) – attached to JDA the total saleable area from the development is given. Based on the minimum average rate of Rs.4,800/- per sq.ft., the Developer has guaranteed minimum consideration to the Landowners during a period of 8 years towards consideration for the Land contribution. This works out to 31% of the total estimated cash flows from sale of flats/ built up areas. Year-wise estimated cash flows to the Landowners during 8 years period have also been projected in said Annexure-4. Based on the saleable area, the total number of flats to be constructed is also fixed as per Development Plans to be approved by Bangalore Development Authority and Bruhat Bangalore Municipal Corporation.

5.15. He also drew our attention to clause 8.(b).3 of the JDA, if the Developer has not developed fully or fails to sell agreed saleable area at the end of 8th year and there is a shortfall in achieving 31% of the saleable area falling to the share of Landowners, then during 9th year, the Landowner is entitled to 100% Net Revenue till the shortfall in revenue is achieved. After 9th year, if the shortfall continues, the Developer has to pay shortfall/deficit amount to the Landowners.

5.16 Similarly, according to Ld. A.R., as per clause 8.(b).2 of the JDA, the Developer is required to achieve minimum average rate of Rs.4,800/- per sq.ft. to which Landowners are entitled at the end of 8th year and in case of shortfall, the Developer has to make good of the shortfall. These clauses clearly indicates that irrespective of successful completion of the project/development or not, the Landowners have been assured to receive minimum consideration from the development to the extent of 31% of the total saleable area at the end of 8th year, failing which the Developer shall make good of the short fall in minimum consideration.

5.17 He drew our attention to clause No.4.1 of the JDA, the obligations of the Developer with regard to development and construction of the Project have been given in detail. Nowhere it is mentioned that the Landowner is responsible to flat buyers. In case of any claim or liability has arisen from the development against the Landowners, the Developer shall indemnify the same. Landowner is liable only for the defects in the title of the Land. Under RERA Act also, Landowner is responsible for the defects in title of the Land and not for development and construction of the project and the Developer alone is responsible.

5.18 He submitted that as mentioned in the preceding paragraphs & as held by the Hon’ble Supreme Court on nomenclature of Joint Development Agreement, in the instant JDA dt 28-3- 2011, there are no provisions for share control of interest or enterprise and shared liability for losses by the appellant. The appellant has no say or control in the development and construction of the project and it did not participate in the business and management of the project and it has no share in the profit/loss of the venture. The appellant is not a co-adventurer in the Project and not responsible for development and construction of the project.

5.19  According to him being owner of the project Land, a Agreements for sale of proportionate undivided share in Land allocated to each Flat are being entered into with the Buyers in the name of the appellant pursuant to Power of Attorney dated 30-3-2011 granted to the Developer. A Construction Agreement for developing & construction of Flats are being entered into by the Developer in its name only with the Buyers. In the Sale Deed also, the appellant being a Land owner, is made a party for conveying the proportionate UDS in favour of the flat buyer and not for conveying the flats constructed therein by the Developer.

5.20 He submitted that the assessee has been offering the entire revenue received from developer through Escrow Collection Account towards Land contribution after deducting nominal Land cost for tax as Long-term Capital Gains and no proportionate cost incurred for development and construction of flats to the extent of its revenue share is being deducted from the said revenue. Hence it is a capital gains derived from sale of Land/UDS under JDA.

5.21 In support of above arrangement of receipt of revenue share on deferred basis from the JDA through Escrow Bank Account mechanism, the Ld. A.R. relied on the following decision of ITAT, Bangalore :-

The ITAT, Bangalore in case of Dy.CIT vs Sri Vinod Narappa Reddy (ITA No.1853 to 1855/Bang/2018 – Date of Order :5-10-2020) on the receiving the revenue on the sale of each of the apartment in its share and is accordingly receiving it year on year, held as under:-

“17. We notice that the assessing officer has treated the amount received by the assessee as business receipts, solely for the reason that the amounts were received in instalments. The undisputed facts remain that the assessee is the owner of land and he has transferred the same to the developer, M/s Shriram Properties Ltd under a Joint Development Agreement. It is a fact that the assessee has not carried on any venture or business activity by so transferring the land. On the contrary, it is M/s. Shriram Properties Ltd. is carrying on business activity. The role of the assessee is restricted to transferring the land and receiving the consideration. There is no dispute with regard to the fact that the land was held by the assessee as “capital asset” only. Hence the transfer of land would give rise to capital gains only as per the provisions of the Act.

18. It so happened that the consideration for transfer of land was so fixed that the assessee would be receiving 2.64% of the sale consideration of flats that are going to be constructed. Hence the assessee would be receiving amounts as and when the flats are sold. As rightly observed by learned CIT(A), the receipt of consideration over a period on sale of a capital asset does not change the true nature of transactions from capital gains to business. Irrespective of timing of capital asset would give rise to capital gains only. Hence we are of the view that the learned CIT (A) was justified in holding that the amounts received by the assessee is assessable as long term capital gains.”

He submitted that the income from sale of assets as shown as direct income in Schedule-8 attached to Statement of Income and Expenditure but under the head “Other Income” in the main Statement of Income & Expenditure

5.22 According to Ld. A.R., the following observation in para 2.1.2 of the revision order, the learned Pr.CIT is wrong:

That the assessee’s own accounting in the P&L Account Schedule-8 shows that the land transferred is a trading property but tax has been paid u/s 112 @ 20% which should have been paid @30% as the whole activity undertaken by the assessee in the form of signing of Development Agreement with the builder is nothing but an adventure in the nature of trade.”

5.23 The Ld. A.R. submitted that the appellant is a partnership firm and there is no standard format prescribed for preparation of financial statements by partnership firms, unlike for companies under Companies Act,2013. Instead of Statement of Profit and Loss, a partnership firm prepares “Statement of Income and Expenditure” wherein all the income received/earned by the Firm during the financial year are reported under main heading “Income” with no prescribed set of sub-classifications. Whereas in Statement of Profit & Loss, the Companies are mandatorily required to show the income from operations and other income separately. The appellant, in the main “Statement of Income & Expenditure” for the FY ended 31st March, 2015, has shown the net long-term capital gains of Rs. 47,42,88,744 (after deducting proportionate cost of acquisition of Rs. 27,52,638) as “Other Income” and Interest income of Rs. 30,50,632 separately. Whereas, in the Tally Accounting Software used by the appellant, all the income received are shown under sub-heading “Direct Income” and all the direct costs/expenses are shown under sub-headings “Cost of Trading Properties”/ “Direct Expenditure” and the General & Administrative expenses incurred as “Indirect Expenses” etc. Due to these wrong classifications in the Tally Software, inadvertently the same headings are extracted in the relevant Schedule No.8 to Statement of Income & Expenditure.

Further, there is a mistake of inter-change of Schedule Nos. 8 & 9 vis-à-vis the main Statement of Income & Expenditure. The balance cost of capital asset (after deduction of proportionate cost of acquisition) is shown correctly as “Binnypet Land” in Schedule No.6 under heading “Capital Work-in-progress” in the Balance-sheet.

5.24 However, in the Return of Income filed for AY 2015-16, in the Schedule – Part-A of P&L, the income from JDA is declared under heading “Other Income” – sub-heading “Any Other Income” and not under heading “Revenue from Operation”. In the Schedule –Part B – TI – Computation of Total Income as well as in Schedule CG – Capital gains, the appellant has shown the income received from JDA under heading “Capital Gains” Income from Capital Gain” as “Sale consideration (LTCG)” and cost as “Cost of Acquisition” by way of deduction from Gross LTCG. In this regard, the appellant submits that any treatment of taxability of income reported in the Statement of Income and Expenditure/ Statement of Profit and Loss, is not dependent on how it is reflected therein but on the true nature and source of such income. It is submitted that the entries in the books of financial statements do not fasten the tax liability and the tax liability is based on the provisions of the Act independent of the manner of presentation in the financial statements.

5.25  In this context, the Ld. A.R. relied on the judgement of Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co.Ltd. vs CIT (Central) Calcutta 82 ITR 363 (SC) wherein, the Hon’ble Supreme Court has held that –

“We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction.

Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter….”

5.26 Claiming General & Establishment Expenses claimed in the Return of Income by the appellant does not construe the fact that intention of the appellant was to conduct business by entering into a JDA:-

“In para – 2.1.3 of the revision order, the learned Pr.CIT has incorrectly stated that “the assessee has also claimed certain business expenditure in the Return of Income which shows the intention of the assessee was to conduct business by entering into Development Agreement dated 28.03.2011.”

5.27 The LD. A.R. submitted that it has claimed only General & Establishment Expenses amounting to Rs.51,74,991 (including depreciation on a vehicle) incurred during the year in its Return of Income. These expenses are not related to any specific business activities as held by the learned Assessing officer in the original assessment order dated 18.12.2017, the appellant has NIL business income and has not carried out any business activities. All these expenses are revenue in nature and are incurred to keep its legal existence alive, to maintain its establishment & to facilitate smooth conduct of its activities. Other than general & establishment expenses, the appellant has not incurred any business expenses pertaining to any business activities in any previous years. As such, the appellant has never claimed any business specific expenses right from its inception to till date. Hence the presumption of the learned Pr.CIT that the appellant has claimed certain business expenditure in its Return of Income, is factually incorrect and non-application of mind on the facts and circumstances of the case.

5.28 Observations of the Pr.CIT about not offering the Capital Gains on date of signing of JDA by the appellant in AY 2011-12 as deemed transfer as per section 2(47)(v) of the Act is incorrect.

In para 2.1.2 of the revision order, the learned Pr.CIT has stated that “It is also seen from the return of income filed for AY 2011-12 that assessee has not disclosed any income on signing of Development Agreement under head long-term capital gains. The assessee has not treated the handing over the land to the Builder vide Development Agreement dated 28.3.2011 as deemed transfer within the meaning of section 2(47)(v) of the Act.”

5.29 The learned Pr. CIT is first admitting that land given under JDA is capital asset

It is obvious from these statements of the learned Pr.CIT that the Land contributed by the appellant under JDA is a Capital Asset, subject matter of transfer u/s.2(47)(v) of the Act and resulting income received from JDA is Capital Gains. It is apparent from these observations, that the Revenue’s intention was to tax the income from JDA as Capital Gains in the year of transfer or deemed transfer, but it could not do so. Hence section 263 of the Act has no application with a view to change the taxing of said income from Long-term Capital Gains to Income from Business for A.Y.2015-16. The learned Pr.CIT is restrained from bringing the same as business income at a later date due to change of his mind through revision order u/s.263 of the Act.

5.30 Doctrine of Real Income theory as propounded by the Hon’ble Supreme Court.

The Ld. A.R. submitted that under section 45 read with section 48 of the Income Tax Act, “Profits and gains should arise” from the transfer of a capital asset and income should be computed after the consideration has been received or accrued. Some real income must arise on the assumption that there is transfer of capital asset. This concept of real income theory has been canvassed by the Hon’ble Supreme Court in the following cases:- .

i) CIT vs Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC)

ii) Morvi Industries Ltd vs CIT. 82 ITR 835 (SC)

5.31 The Hon’ble Supreme Court, in the case of CIT Vs Shoorji Ballabhdas & Co on the concept of “real income theory” made following observations:-

“Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialise. Where income has, in fact, been received and subsequently given up, in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”.

5.32 The Ld. A.R. submitted that the above mentioned decisions of Hon’ble Supreme Court validate the action of the appellant offering the income received from JDA towards consideration for sale of Undivided Share in Land, as Long-term capital gains in its Return of Income for A.Y.2015-16, when the said income was actually received or accrued to the appellant as per explicit terms contained in the JDA dated 28-3­2011.

5.33 In addition to real income theory as propounded by Supreme Court, the Ld. A.R. relied on the clause 2.1 of the Joint Development Agreement dated 28-3-2011, which is reproduced below :-

“2.1………………………………………………………………………………………………………….. …………… the Landowners (the appellant & Landowner no.2) in terms of this Agreement grant the Development Right, with the authority to the Developer to enter upon (by means of the license referred to above) and develop the Project Lands and to retain 69% of the Net Revenue to subject to the compliance of the terms and conditions of this Agreement. However, no possession has been conferred by the appellant (Landowners) on the Developer to continue as Part Performance in terms of section 53A of the Transfer of Property Act, 1882 read with section 2(47)(v) of the Income-tax Act,1961 through this Agreement.”

5.34  He also drew our attention to the Clause 5.1.(a) of the JDA dated 28.3.2011, which says as under:-

“(a) The Landowners shall grant license to the Developer for bringing his men, material, and plant and equipment for development on the Project Land for construction and development of the proposed Project to utilize the permissible FAR available on the said Land.”

5.35 It is submitted that from the above clauses as contained in the JDA, it is evident that the appellant has given permissive license in favour of the Developer to enter into the project land to do the development and carry out construction activities and not the possession within the meaning of section 53A of the T.P.Act read with section 2(47)(v) of the I.T.Act. on the date of execution of JDA.

5.36 In this connection, the Ld. A.R. relied on the following case laws:-

a) ITAT, Bangalore in following cases –

i) Smt.Lakshmi Swarupa vs ITO (ITA No.2278/Bang/2018 – Date of Order – 12.10.2018), and

ii) Shri A.R.Prasad vs ITO (ITA No.956/Bang/2016 dated 28.8.2019)

iii) M/s. Anugraha Shelters Pvt.Ltd. vs Dy.CIT (ITA 2314/Bang/2016 – date of order – 22-11-2021

iv) Shri Krishna Prasad Mikkilineni v. DCIT (ITA No. 2278/Bang/2018) date of order – 03.01.2022

v) Dy CIT vs M/s Sri Sai Lakshmi Industries Pvt. Ltd. (ITA No.1624/Bang-2019) date of order – 15.03.2022, wherein the Hon’ble Tribunal has held that permissive possession/ license given under Joint Development Agreement is not a legal possession and hence cannot be treated as possession in part performance under section 53A of the Transfer of Property Act. Therefore no deemed transfer under section 2(47)(v) of the I.T.Act. is attracted in such cases and accordingly no capital gains arises on grant of mere permissive possession.

b)M/s. Seshasayee Steels Pvt. Ltd. vs ACIT (SC) in Civil Appeal No.9209 of 2019 – Date of Judgement – 4-12-2019, wherein held that no deemed transfer u/s. 2(47)(v) pursuant to provisions of section 53A of the Transfer of Property Act arise on the date of execution of a Development Agreement by a Landowner in favour of a Developer.

On section 2(47)(v) of the Act, the Hon’ble Supreme Court has held as under:-

a) In order to attract the provisions of section 2(47)(v), provision of section 53A of Transfer of Property Act, 1882 needs to be fulfilled.

b) As per the agreement to sell only a license was given to the builder upon the land for the purpose of developing the land into flats and selling the same.

c) Such license cannot be said to be ‘possession’ within the meaning of section 53A of Transfer of Property Act 1882, which is a legal concept and which denotes control over the land and not actual physical occupation of the land.

d) Since provisions of section 53A of TP Act are not attracted here, hence even section 2(47) (v) cannot be attracted

5.37 According to Ld. A.R, in view of the foregoing judgements, the provisions of JDA as explained above, and the facts & circumstances of the appellant’s case, there was no incidence of capital Gains arising out of deemed transfer within the meaning of section 2(47(v) of the Act on the date of execution of JDA on 28-3-2011 (during AY 2011-12). Therefore, the observations of the learned Pr.CIT that the appellant has not disclosed any income under head long-term capital gains for tax in the return of income for AY 2011-12 on signing of Development Agreement, by treating the handing over of land to the Builder for development, as deemed transfer u/s.2(47)(v) of the Act, is based on wrong presumptions of the facts of the appellant’s case and unsustainable in law.

He placed reliance on the Section 2(14) of the Act and also CBDT circular No.4 dt 15-6- 2007 which confirms that an assessee can hold same class of assets as investment and stock-in-trade simultaneously.

5.38 According to him, from the above definition, that a property can be ‘capital asset’ even if connected with the business of the assessee. Therefore, an assessee is entitled in law to hold certain class of assets as capital assets even while he is dealing with the asset of similar type in business with idea of commercial exploitations.

5.39 With regard to the CBDT Circular No.4 of 2007 dated 15-6-2007, he submitted that it has been mentioned therein that an assessee can hold the same class of assets as investment and also stock-in-trade simultaneously.

5.40 He submitted that an assessee can hold the same class of assets as investment and also as stock-in-trade simultaneously. Th above views of the CBDT expressed in their circular no.4 of 2007 dated 15-6­2007 has been upheld by the Courts/Tribunals in the following cases and relied on following judgements:-

a) The Hon’ble Supreme Court dismissed Revenue’s SLP challenging the Bombay High Court judgement in case of Principal Commissioner of Income-tax-19 vs M/s.Jogani & Dialani Land 2019(4) TMI 1315 read with ITAT, Mumbai in the case of ACIT-16(13), Mumbai vs Jogani & Dialani Land Developers & Builders – 2015 (12) TMI 1797.

b) M/s. Thirumala Venkateshwara Estates vs Dy.CIT ITA No.553/Bang/2010 – Order dated 28-07-2010, wherein held as under:-

The Bangalore Tribunal held as under:-

• The assessee firm has shown this particular asset as capial asset in its balance sheet through out the entire period and it was never shown as a current asset or as a part of stock-in-trade of the assessee. There is nothing on record to support the argument of the revenue that the said property was converted by the assessee firm as an item of stock-in-trade.
• The decisions relied on by the assessee in the case of D.R.Puttana Sons Pvt. Ltd. (162 ITR 468) and Bhoopalam Commercial Complex and Industries Pvt. Ltd (262 ITR 517) considered similar circumstances and held that the head of income cannot be determined on the basis of the objects described in the Memorandum of Association of an assessee Company.
• The assessee firm might be having a number of objects elucidated in its partnership deed. The assessee firm being primarily engaged in the business of construction of commercial complexes and real estate, does not mean that every asset owned and held by the assessee would be stock-in-trade. The assessee could very well hold immovable properties as capital asset even while the business of the assessee might be in dealing of immovable properties. Therefore, only for the reason that the assessee was mainly engaged in the construction business is not a ground to say that every asset held by the assessee should be treated as part of stock-in-trade. A decision in this regard can be made only after examining the relevant facts and circumstances. In the present case, the assessee has shown the property as one of its capital assets under the head “fixed assets” in the balance sheet.
• Therefore, in the facts and circumstances of the case, we hold that the land and building sold by the assessee was capital asset and surplus arose out of that sale is in the nature of long term capital gains and the assessee has rightly offered the surplus for taxation as long-term capital gains.

Jt.CIT, Ahmedabad Vs Shri Niketan Krishorechandra Patel (ITA No.3682/Ahd/2015 – Date of Order – 25.7.2019, wherein held that the assessee having business of land trading can show capital gains from arising out of transfer of land and claim exemption under section 54F. Based on the crux of CBDT Circular dated 15.6.2007, the Hon’ble Bench further held that where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.

5.41 According to Ld. A.R., the learned Pr. CIT erred in concluding that the case of the appellant is an adventure in the nature of trade, on the basis of certain court decisions, but did not specify or mark the said proposition – the enabling legal provision of invocation of clause (d) of Explanation 2 to Section 263 of the Act in the revision order dated 18-3-2020.

5.42 He submitted that the learned Pr.CIT, in the revision order, relied on the decision of the Hon’ble Supreme Court in the case of Raja J. Rameshwar Rao v. CIT 42 ITR 179 (SC) and came to the conclusion that the appellant case is that of adventure in the nature of trade. He submitted that the facts of the case relied upon by the learned Pr. CIT are entirely different and are not comparable, to the extent that in the case cited by the learned Pr. CIT the assessee developed plots by itself and sold in order to earn higher income and thus carried on activities that of business, undertaking all risks and rewards, responsibilities and obligations as that of a businessman but did not include the said receipts as income from business. The assessing officer made addition, treating the sale of divided plots after developing the area to make it more attractive and treating the land as stock in trade “as an adventure in the nature of trade”. Whereas in the appellant’s case, the appellant never carried out any activity of developing the plots or construction of apartments but simply assigned the Land to a Developer only to receive a passive income. In the case relied upon by the learned Pr.CIT, income arising out of the activity is an active income and thus the activity may be treated as adventure in the nature of trade. In the case of passive income, no effort is required to earn passive income and no responsibilities, no obligations, no risks need to be undertaken to earn the passive income. Thus, is it submitted that, the activity to earn passive income cannot be treated income as that of adventure in the nature of trade.

5.43 Ld. A.R. also submitted that the decisions relied upon by the learned Pr.CIT in the case of CIT v. Ramaiah and Others 146 ITR 39 (Karnataka) is again as that of sale of building sites after converting agricultural lands into multiple plots. The assessee went on selling the plots year after year realising more and more profits. In the case of CIT v. P. Kannan 154 ITR 441 (Karnataka), the assessee was a building contractor, and he divided the land into plots and sold the plots immediately after purchase of land. Therefore, the facts of both case are not comparable to the facts and circumstances of the case of the appellant. The test to be applied whether a particular activity is an adventure in the nature of trade or not is whether the assessee exploits by investing and employing money, machinery and manpower on the property by way of dividing the land into plots or developing them and construction of apartments and reselling or not?

He relied on the following Case Laws in support of his submissions that Income received by a Landowner from sale of Land/Undivided Share in Land pursuant to Joint Development Agreement entered into with a Developer/Builder is “Capital Gains” and not adventure in the nature of trade under head “Income from Business”.

He also submitted that in the following cases, wherein it was held that either receipt of revenue share from JDA towards contribution of Land or income from sale of built up area share received from JDA by a Landowner is Capital gains and not business income arising from adventure in the nature of trade.

5.44 Case laws decided by Hon’ble Karnataka High Court

(i) CIT vs Razia Sulaiman (ITA No.412 of 2007 – Date of Order – 19­9-2011)

(ii) CIT vs Smt. Suparna Mahesh (ITA No.3231 of 2005 – Date of Order – 8-2-2011)

5.45 Case laws decide by Hon’ble Bangalore ITAT

(i) Dy.CIT vs Sri Muppala Bhaskar Reddy (ITA No.909/Bang/2019 – Date of order – 4-4-2022)

5.46 Case laws decided other Hon’ble High Court

(i) PCIT vs Rungta Properties Pvt. Ltd – 403 ITR 234 (Calcutta)

5.47 Case laws decided by other Hon’ble Tribunals

(i) ITO vs Sitaram Chamaria (2006) 6 SOT 594 (MUM)

5.48 He also relied on following case Laws wherein it was held that sale of Land after development is Capital gains and not income from business arising from adventure in the nature of trade.

5.49 Case laws decided by Hon’ble Karnataka High Court

(i) CIT vs M/s Bagmane Developers Pvt. Ltd. – Karnataka HC in ITA nos.157/2011 – c/w ITA No.145 & 146/2011; ITA No.183,349 & 350/2014 – Date of order – 3-11-2016

(ii) CIT vs M/s. Kishan House – Karnataka HC in ITA No.326 of 2010 –

c/w in ITA No.327 of 2010 – Date of order – 29-1-2020

5.50 Case laws decided by other Hon’ble High Courts

(i) CIT vs Kasturi Estates Pvt. Ltd. (1966) 62 ITR 578 (Mad)

(ii) CIT vs MLM Mahalingam Chettiar (1977) 107 ITR 236 (Mad)

(iii) CIT vs Suresh Chand Goyal (2008) 298 ITR 277 (MP)

5.51 Case laws decided by other Hon’ble Tribunals

(i) DCIT vs Shri Nandlal Jaigopal Agarwal – ITAT, Ahmedabad in ITA No.2534/Ahd/2015 with c/o No.185/Ahd/2015 – Date of Order 14-11-2018

5.52 The Ld. A.R., in view of the above submissions prays that this Tribunal allow the appeal filed by the appellant for advancement of substantial cause of justice.

6. D.R. relied on the order of Ld. CIT(A).

7. We have heard the rival submissions and perused the materials available on record. In the assessment year 2015-16, the assessee filed the original return of income electronically on 2.9.2015 declaring income of Rs.47,90,41,310/- under head “Capital Gains”. The A.O. issued notice u/s 143(2) of the Act for scrutiny calling for various details as follows:-

i. Long Term Capital Gains.

ii. Mis-match in income/capital gain on sale of land or building.

7.1 In other words, the case was selected for limited scrutiny for examination of above issues. The assessee submitted various details including Form 26AS, audited financials, agreement copy dated 28.3.2011 between the assessee and Relationship Properties Pvt. Ltd. The A.O. observed that assessee has shown Nil business income during this assessment year 2015-16. However, assessee claimed expenditure of Rs.52,11,197/- though assessee has not carried out any business in the assessment year under consideration. The assessee has been given opportunity vide notice u/s 142(1) of the Act through e-mail dated 10.11.2017 to explain why business expenses should not be disallowed in the absence of business carried on by the assessee. The assessee filed written submissions stating that the business is nothing more than the continuous course of activities and all these activities need not start simultaneously in order to commence the business operation. It is also not necessary that business must be equipped in the sense that it can commence all its activities in the same time. He relied on the judgement of Hon’ble Madras High Court in the case of CIT Vs. Electron India (241 ITR 166) (Mad.), wherein held that saleability of product is not relevant criteria to find out whether a business has commenced its activities or not. During the year, the assessee has not earned business income except capital gains from sale of land on account of JDA with the RRPL interest income, and nil business income. But the activities of the assessee is in existence and incurred general and administrative expenditure, which are incidental to the assessee’s business. Further, assessee has purchased a car and used for the purpose of business operation during the relevant previous year and hence, depreciation and maintenance expenses of car to be allowed as deduction. Meanwhile, the A.O. converted the limited scrutiny into complete scrutiny through the approval of competent authority i.e. Principal CIT, Bangalore vide letter dated 8.12.2007 received by AO on 13.12.2017. Accordingly, he completed the assessment making addition of Rs.51,74,991/-, disallowing the business expenditure claimed by assessee. On examination of this assessment order issued u/s 143(3) of the Act, the Principal CIT was of the opinion that the assessee has purchases shares numbers 17,95,00,000 of Rs.10/- each at par valuing Rs.179.5 crores to M/s. ETA Star Property Developers Ltd. from ETA Constructions (India) Ltd. as per agreement dated 24.3.2012. It was found that M/s. ETA Constructions India Ltd. sold the above shares of M/s. ETA Star Property Developers Ltd., Chennai to the assessee at a price of Rs.1,79,57,77,387/-. It was also mentioned in the agreement that assessee along with seller in this agreement major part of the assessee, has entered into a JDA with M/s. Relationship Property Ltd. for development of the residential township on the land measuring 42 acres owned by assessee’s firm at Binnipet, Bangalore and 5 acres owned by M/s. ETA Karnataka Estates Ltd. In terms of said JDA dated 28.3.2011, M/s. Relationship Property Ltd. has paid a sum of Rs.180 crores as refundable deposit to be repaid in 8 yearly instalments during the development of above property. Since the amount of Rs.180 crores was lying with the assessee firm, with the consent of all the partners of the purchaser had permitted the seller i.e. ETA Construction India Ltd. to withdraw the said sum of Rs.180 crores as interest free loan for purchase of equity shares of M/s. ETA Star Properties Developers Ltd., Chennai in the name of the seller company aforesaid, which has been purchased by assessee firm vide aforesaid agreement.

7.2 It is further seen from the Development Agreement dated 28.03.2011 that the assessee along with other co-owners has given the development rights to M/s. Relationships Properties Pvt. Ltd. in consideration of 31 percent of the net revenue to be received by the vendor on sale of properties being developed by the builder as per the DA. The assessee had also received refundable deposit of Rs. 180 Crore. The realization mechanism has been discussed in detail in para-3.2 of the joint development agreement dated 28.03.2011. It is also seen from the return of income filed for A.Y. 2011-12 that assessee has not disclosed any income on signing of development agreement under the head long term capital gain. The assessee has not treated the handing over of land to the builder vide DA dated 28.3.2011 as deemed transfer within the meaning of section 2(47)(v) of the IT Act. The agreement signed by the assessee and realization mechanism of revenue noted in the DA clearly shows that the assessee has entered into this agreement for the purpose of earning LTCG. The assessee has agreed to receive 31 percent of the net revenue along with other land owners on year to year basis which makes it an adventure in the nature of trade. The assessee has offered income of Rs.47,42,88,744/- as income under the head LTCG by reducing the cost of trading properties of Rs.27,52,638/- from the sale proceed received by the assessee during this year. The assessee’s own accounting in the P&L A/c schedule 8 shows that the land to be transferred as capital asset but tax has been paid u/s 112 at the rate of 20% which should have been paid at the rate of 30% as the whole activity undertaken by the assessee in the form of signing of Development Agreement with the builder is nothing but transfer of capital asset.

7.3 Thus, Principal CIT was of the opinion that the action of AO to tax received under the head Long Term Capital gain is erroneous so far as prejudicial to the interest of the revenue and set aside the assessment order and directed the AO to proceed to assess the income under head “business income” which is earned by the assessee from JDA dated 28.3.2011 as an adventure in the nature of trade in terms of decision of Hon’ble Supreme Court in the case of Raja Jay Rameshwar Rao Vs. CIT 42 ITR 179.

7.4 In this case, assessee received land at Binni Pet from a partner as a capital contribution on capital account and in accordance with provisions of section 45(3) of the Act and the said amount was granted as capital asset at its book value in its books of accounts. Every year in its balance sheet the said land was shown as fixed asset/capital work in progress by setting up the IT SEZ park on said land measuring about 42 acres. The said land has been not developed by the assessee and same has been given for JDA dated 28.3.2011 and the developer is permitted to develop the project over a period of 8 years. The assessee being a land owner just handed over the possession of the impugned property to the developer and assessee itself not involved in the development activities so as to show the assessee engaged in the activities of adventure in the nature of trade. The developer has to do entire development and construction of the project at their own cost and resources. All the activities relating to the project such as obtaining plan sanctions and other approvals from various Government authorities, planning & execution of development and construction of the project,, formulating marketing strategy, pricing and sales promotional activities, selling of flats to prospective buyers, collecting receivables from flat buyers as per demand schedules, arranging finance and other resources for development and construction of project, etc. done by the developer on his own. Except to right to receive agreed revenue share, through a designated escrow bank account towards consideration for land, contribution, the assessee no role, right, responsibility, accountability, allowability in such project, these are clearly mentioned in the JDA entered into by the assessee with M/s. Relationship Property Ltd. for development of residential township on the said impugned land. The assessee herein clearly brought on record the following facts to support the assessee’s case that assessee is only a landlord not engaged in the development activities, which is clearly established by the assessee as seen from the JDA, which was clearly mentioned by the Ld. A.R. in his arguments.

7..5 The learned Pr. CIT erred in concluding that the case of the appellant is an adventure in the nature of trade, on the basis of certain court decisions, but did not specify or mark the said proposition and the enabling legal provision of invocation of clause (d) of Explanation 2 to Section 263 of the Act in the revision order dated 18-3-2020.

7.6 The learned Pr.CIT, in the revision order, relied on the decision of the Hon’ble Supreme Court in the case of Raja J. Rameshwar Rao v. CIT 42 ITR 179 (SC) and came to the conclusion that the appellant case is that of adventure in the nature of trade. The facts of the case relied upon by the learned Pr. CIT are entirely different and are not comparable, to the extent that in the case cited by the learned Pr. CIT the assessee developed plots by itself and sold in order to earn higher income and thus carried on activities that of business, undertaking all risks and rewards, responsibilities and obligations as that of a businessman but did not include the said receipts as income from business. The assessing officer made addition, treating the sale of divided plots after developing the area to make it more attractive and treating the land as stock in trade “as an adventure in the nature of trade”. Whereas in the appellant’s case, the appellant never carried out any activity of developing the plots or construction of apartments but simply assigned the Land to a Developer only to receive a passive income. In the case relied upon by the learned Pr.CIT, income arising out of the activity is an active income and thus the activity may be treated as adventure in the nature of trade. In the case of passive income, no effort is required to earn passive income and no responsibilities, no obligations, no risks need to be undertaken to earn the passive income. Thus, the activity to earn passive income cannot be treated income as that of adventure in the nature of trade.

7.7 The decisions relied upon by the learned Pr. CIT in the case of CIT v. Ramaiah and Others 146 ITR 39 (Karnataka) is again as that of sale of building sites after converting agricultural lands into multiple plots. The assessee went on selling the plots year after year realising more and more profits. In the case of CIT v. P. Kannan 154 ITR 441 (Karnataka), the assessee was a building contractor, and he divided the land into plots and sold the plots immediately after purchase of land. Therefore, the facts of both case are not comparable to the facts and circumstances of the case of the appellant. The test to be applied whether a particular activity is an adventure in the nature of trade or not is whether the assessee exploits by investing and employing money, machinery and manpower on the property by way of dividing the land into plots or developing them and construction of apartments and reselling or not?

7.8 In the case of CIT Vs. Administrator of the Estate of Late Shri E.F. Dinshaw in ITA No.345 ITR 529 (Bom) wherein held that:-

“Held, that the acquisition of the land was evidently not motivated by an adventure in the nature of trade. There was no transaction involving sale of the land by D during his life time. Neither his son nor for that matter his daughter purchased the land. The land had devolved on his son and daughter. Upon the death of D in 1936, there was no transaction involving the sale of the land for a period of sixty-five years since the purchase of the land. The assessee was the administrator of the estate of his father. Half the interest of the land devolved upon the assessee under the will that was executed by D. The finding of fact recorded by the Tribunal was that independent encroachments gradually took over certain areas of the land. The sale of the land was not motivated by a desire to make a profit, but to protect the corpus and the resulting expenditure due to litigation. There were no improvements on the land by way of laying out drainage, levelling or construction of roads. The Revenue had not challenged the findings of fact recorded by the Tribunal. The expenditure or litigation expenses was treated by the Department on capital account and not set off against income from other sources. Therefore, the surplus that was realised on the sale of the land was in the nature of capital gains.”

7.9 The issue as to whether income that is realised from the sale of land is chargeable to income-tax as capital gains or, as income from business, has been the subject-matter of a considerable amount of judicial precedent. In Jani Ram Bahadur Ram v. CIT 1965) 57 ITR 21 (SC) the Supreme Court laid down the following guidelines (headnote):

“If a transaction is related to the business which is normally carried by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred. A similar inference would arise where a commodity is purchased and sub-divided, altered, treated, or repaired and sold, or is converted into a different commodity and sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with a character of a trading venture. But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade.”

7.10 In G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 , the Supreme Court noted that several factors assumed relevance including (i) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it; (ii) The nature and extent of the transaction involved in the purchase and sale; (iii) Acts subsequent to the purchase for the improvement of the quality of the subject matter; (iv) Any act prior to the purchase showing a design or purpose, the incidents associated with the purchase and resale and the similarity of the transaction to operations usually associated with trade or business; (v) The repetition of the transaction; and (vi) The element of pride of possession.

7.11 In the case of CIT v. V.A. Trivedi [1988] 172 ITR 95/ 38 taxman 102 a Division Bench of this Court, while holding that no single test or formula can be applied in determining whether a transaction involving purchase and sale of land is an adventure in the nature of trade observed that generally speaking, the original intention of the party in purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions afforded valuable guides in determining whether the assessee was carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading adventure. In CIT v. Dr. Indu Bala Chhabra [2002] 258 ITR 111/[2003] 132 Taxman 45 Division Bench of the Delhi High Court dealt with a case where the assessee who derived her income from the medical profession had acquired certain properties as an asset for constructing a Nursing Home. Subsequently, after a laps of time, the assessee carried out construction on the property. The Tribunal had noted that after making the purchase, the assessee had disposed of the property nearly twenty years thereafter. No prudent person, the Tribunal held, would have waited for such a long period of time if it was a business proposition. The gain resulting from the sale transaction was treated as capital gains and not as income arising out of an adventure in the nature of trade. The Division Bench of the Delhi High Court, relying inter alia upon the judgment of the Supreme Court in G. Venkataswami Naidu (supra), affirmed the view of the Tribunal. Similarly, in a decision of the Punjab and Haryana High in CIT v. Sushila Devi Jain [2003] 259 ITR 671 /130 Taxman 120, the assessee had acquired certain property under the will of her husband. The property consisted of a large tract of land which was sold out in part. The High Court held that the relevant test was to find out the intention of the assessee at the time of the purchase of the land. The assessee had never purchased her land since it had devolved on her through testamentary succession. The land was sold in parts because the huge area could not be sold in one transaction and such an activity was held not to amount to trade or business within the meaning of the Act.

7.12 These principles have again been succinctly summarised in the statement of law in Kanga & Palkhiwala’s (eighth edition 1990 page 1547……. ) as follows:

“Land and buildings.- Where an individual inherits or otherwise acquires land and deals with it as an owner, he may be regarded as holding it as an investment rather than as something with which to trade (Dolores v. Comr of Taxation 82 ITR 272 (PC); CIT v. Raunaq Singh 85 ITR 220 ; CIT v. Thiagarajan 129 ITR 115 ; CIT v. Saraswati 137 ITR 656 ; IR v. Reinhold 34 TC 389; Williams v. Davies 26 TC 371, 15 ITR Suppl 50); and the same principle applies to a company incorporated for the purpose of management of a family estate (Ukhara v. CIT 120 ITR 549 (SC). The mere fact that the owner of an immovable property takes steps to enhance its value before selling it, does not point to an adventure in the nature of trade (Taylor v. Good 49 TC 277, 296-7 (CA). A landlord may lay out part of his estate with roads and sewers and sell it in lots at various times for building, but if he does this as a landed proprietor and not as a land speculator, the sales would be on capital account ((Hudson v. Stevens 5 TC 424, 436­8 (CA); Gajalakshmi v. CIT 22 ITR 502 ; CIT v. Premji 113 ITR 785 ; Kaur Singh v. CIT 502; CIT v. Premji 113 ITR 785; Kaur Singh v. CIT 144 ITR 756; CIT v. Nathuram 151 ITR 767 ; CIT v. Jolly 169 ITR 72 ; CIT v. Mohammed Mohindeen 176 ITR 393 ).

7.13 However, the circumstances of a case may indicate that the land is acquired, developed and sold in plots by way of a venture in the nature of trade (Rameshwar v. CIT 42 ITR 179 (SC); Mohammed Meerakhan v. CIT 73 ITR 738 (SC); Seth v. CIT 74 ITR 852; Baijnath v. CIT 91 ITR 208 ; CIT v. Krishna Rao 120 ITR 101 ; CIT v. Jawahar 127 ITR 431 ; Harbans Singh v. CIT 132 ITR 77; CIT v. Chikkaveerayya 164 ITR 41; Parvathi v. CIT 164 ITR 675 ; Re Mody 8 ITR 179; Thakkar v. CIT 7 ITR 154; Pilkington v. Randall 42 TC 662 (CA); Broadbridge v. Beattie 26 TC 63; Laver v. Wilkinson 26 TC 105. See also Bhanumati v. CIT 119 ITR 69 ). A purchase and resale of land may be held to be in the nature of trade even if the land is not parcelled out or developed or advertised for sale (Venkataswami v. CIT 35 ITR 594 (SC); Reynolds v. Bennett 25 TC 401; Gray v. Tiley 26 TC 80; Somasundaram v. CIT 47 ITR 336 ; Praise v. CIT 60 ITR 566 ; Estate Inv v. CIT 121 ITR 580 ; Bhagirath v. CIT 139 ITR 916 ; CIT v. Minal 167 ITR507. Cf. Saroj v. CIT 37 242 (SC)

7.14 Shah J, speaking for the Supreme Court in Jankiram Bahadurram v. CIT (57 ITR 21, 26, followed in CIT v. Anandlal 107 ITR 677 and CIT v. Gordhandas 118 ITR 81), held that “a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade”. In that case the purchase and sale of a jute press along with the land on which it stood was held to be on capital account. In Venkataswami Naidu v. CIT (35 ITR 594, 609-10), purchase of lands by managing agents with the sole object of reselling them to the managed company at a profit was held by the Supreme Court, on the facts of the case, to constitute an adventure in the nature of trade.

7.15 The onus of proving that the land formed part of the business assets is on the Department, and in the absence of any evidence or finding to the contrary the Court would conclude that the land was treated and held as a capital investment (Wadia v. CIT 17 ITR 63), Alapati v. CIT (35 ITR 73); Vadlamani v. CIT (51 ITR 304); CIT v. Nathalal (126 ITR 555).”

7.16  In the case of CIT Vs. Delhi Apartments Pvt. Ltd. (2013) 352 ITR 322 wherein held as under:-

“An assessee hold lands for business or as an investment and there was no bar on an assessee in undertaking, along with his business of sale/purchase of land also an investment in land. In these circumstances, the Tribunal held that the assessee could very well be a trader in land as well as an investor in land simultaneously, depending on what his intention was and how he treated the asset. The Tribunal written a finding that the land was purchased and shown as an asset in the balance sheet and that land had also been used for agricultural purpose. It also noted the fact the land had been held for a long time, having been purchased in 1994-96. The Tribunal was also conscious of the fact that there was no evidence that borrowed capital had been used for the purchase. All these circumstances, led to Tribunal to the inference that the land was held as an asset, therefore, the assessee had appropriately offered it for taxation under the head “Capital Gain”. There was no perversity in these findings, and, therefore, there was to be no inference with the order.”

7.17 In the case of CIT Vs. Saravana Developers (2016) 387 ITR 239 (Karn) wherein held that:-

7.18 The assessee is only landlord who handed over the impugned land to M/s. Relationship Property Ltd. for development of residential flats. Being so, the gain arising out of said transaction from the JDA dated 28.3.2011 is to be taxed as long term capital gain only.

7.19 To sum up, assessee being investment firm, in the assessment year under consideration not carried on any business activity and engaged in making investment in properties and shares for the group companies to derive capital appreciation. The land received by assessee as a capital contribution by partner and accounted in the books of accounts as capital asset and shown as fixed asset/Capital Work in Progress and for the purpose of development of IT/SEZ park on said land has been kept by the assessee. It is also admitted fact that assessee not carried out any improvement or any development of said land which was given under JDA vide JDA dated 28.3.2011 and the development work has been entrusted to the developer only and the assessee no way concerned with the development activities. The assessee is entitled to receive a revenue year to year basis which has been fixed according to the mutual convenience and that cannot lead to the conclusion assessee is engaged in adventure in the nature of trade. The role of assessee in the development of the project is very passive in nature and assessee only receive the agreed share of revenue in terms of JDA. The profit & loss arising out of the development and construction, sale or marketing of the project are entirely on the head of the developer. The assessee no way concerned with the responsibility attached with the execution of the project. The assessee have no role in the development and construction of the project and there is no requirement of assessee to participate in the execution of the project and it was the sole responsibility of the developer as enumerated in the JDA. The consideration receivable by assessee is already quantified in the JDA and the payment of consideration to the assessee by developer has been spread over a period of 8 years as the completion of project requires period of 8 years and accordingly consideration has been fixed as payable over a period of time that cannot lead to conclusion that the activity carried on by assessee is business activity, which is adventure in the nature of trade. Further, assessee never claimed proportionate cost incurred for development as cost of acquisition while computing the long term capital gain derived from the said property. The assessee offered entire revenue received from developer through escrow collection account towards land contribution after deducting nominal land cost for tax as long term capital gain and no proportionate cost for development and construction of flats to the extent of its revenue share is being deducted from the said revenue. Hence, it is a capital gains derived from sale of lands/UDS under JDA. In view of the above, we are of the opinion that the assessee cannot be said to be carried on the adventure in the nature of trade in the impugned land on entering into JDA dated 28.3.2011. These grounds of appeal of the assessee are allowed.

ITA No.248/Bang/2021 for the A.Y. 2016-17:-

8. Grounds of the appeal are as under:-
General Ground:

1. The order of the learned Pr. Commissioner of Income Tax, Bengaluru passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “Act”) dated 30/03/2021 for Assessment Year 2016-17 in so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant’s case.

Grounds on Order passed u/s 263 of the Act is in Violation of the Principles of Natural Justice:

2. The learned Pr. Commissioner of Income-tax failed to consider the entire objections dated 18/03/2021 filed in response the notice issued under Section 263 of the Act and the decisions of the Hon’ble Supreme Court, Hon’ble Jurisdictional High Court and this Hon’ble Tribunal relied by the appellant in its submissions and consequently the order passed is in violation of the principles of natural justice and required to be set-aside on the facts and circumstances of the case.

3. The grounds mentioned by the learned Pr. Commissioner of Income-tax in the Notice dated 12-3-2021 and the revision Order dated 30-32021 for treating the assessment order dated 26-12-2018 is erroneous, are quite different. As such, the appellant was not given adequate opportunity to present its case precisely against the grounds stated in the revision Order by the learned Pr. Commissioner of Income-tax and hence the same is against principles of natural justice.

4. The learned Pr. Commissioner of Income-tax erred in invoking clause (a) to Explanation — 2 to Section 263 of the Act while passing order under Section 263 of the Act which was not put in the notice under Section 263 of the Act and consequently the order passed u/s 263 of the Act is in violation of the principles of natural justice and required to be quashed on the facts and circumstances of the case.

5. The order passed under section 263 of the Act by the learned Pr. Commissioner of Income-tax is beyond the scope of issues raised in the notice issued under section 263 of the Act and consequently the order passed is bad in law on the facts and circumstances of the case.

Grounds on invoking the provisions of section 263 of the Act are without jurisdiction:

6. The learned Pr. Commissioner of Income-tax is not justified in exercising revisionary powers under section 263 of the Act as the entire proceeding is without jurisdiction and not in accordance with law on the facts and circumstances of the case.

7. The learned Pr. Commissioner of Income-tax has grossly erred in revising the assessment order passed by the learned Assessing officer without appreciating that there is no error, much less prejudicial to the interests of the Revenue to warrant a revision and therefore the order passed by the learned Pr. Commissioner of Income-tax is ultra vires to the scope of Section 263 and requires to be cancelled under the facts and circumstances of the Appellant’s case.

8. The learned Pr. Commissioner of Income-tax erred in holding that he is of the opinion that twin conditions contemplated in section 263 of the Act are satisfied in the present case on the facts and circumstances of the case.

9. The learned Principal Commissioner of Income-tax ought to have appreciated that regarding the issue relating to Long-term Capital gains, the view adopted by the Assessing Officer is one of the possible views, in view of the various judgments available before passing the assessment order in favour of assessee and hence the assessment order is not erroneous on the facts and circumstances of the case.

10. The learned Pr. Commissioner of Income-tax failed to appreciate that the case of the appellant was selected for scrutiny to examine whether value of consideration for computation of capital gains has been correctly shown in the return of income and whether the Capital gains is genuine and has been correctly shown in the return of income and consequently erred in holding that the Assessing Officer has not examined the issue in right perspective by taxing the amount under the head Long-term Capital gains on the .facts and circumstances of the case.

11. The learned Pr. Commissioner of Income-tax failed to appreciate that the learned Assessing Officer before passing the assessment order under section 143(3) of the Act made inquiries and verification of Long-term Capital gains and consequently there is no violation of clause — (a) of Explanation 2 to section 263 of the Act by the Assessing Officer to invoke the provisions of section 263 of the Act on the facts and circumstances of the case.

12. The learned Pr. Commissioner of Income-tax is not justified in law in setting aside assessment order passed u/s 143(3) of the Act by holding that the assessment order is erroneous and prejudicial to the interest of revenue on the facts and circumstances of the case.

Grounds on merits of the matter that the income offered by the appellant under the head Long-term Capital gains is correct:

13. The learned Pr. Commissioner of Income-tax was not justified in law holding that the income earned by the appellant from the sale of Land given under a Joint Development Agreement as a Landowner is taxable under the head income from business as an adventure in the nature of trade instead under the head Income from Capital Gains, on the facts and circumstances of the case of the appellant.

14. The learned Pr. Commissioner of Income-tax grossly erred in holding that the Joint Development Agreement entered into by the appellant with the Developer for mere contribution of Land and receiving revenue share from JDA is that of an adventure in the nature of trade on the facts and circumstances of the case.

15. The learned Pr. Commissioner of Income-tax erred in directing the Assessing Officer to consider the income Offered under the head Long­term Capital Gains as Business Income on the facts and circumstances of the case.

16. The learned Pr. Commissioner of Income-tax erred in holding that the Joint Development Agreement entered is for the purpose of business and not for earning the Long-term Capital gains and signing of Development Agreement with the Builder is nothing but an “adventure in the nature of trade” on the facts and circumstances of the case.

17. The learned Pr. Commissioner of Income-tax relied decisions of the Hon’ble Supreme Court and Hon’ble Jurisdictional High Court are distinguishable on the facts and circumstances of the case of the appellant.

18. The learned Pr. Commissioner of Income-tax failed to appreciate that the appellant correctly offered the income under the head Long-term Capital gains and paid the tax in respect of the income from the Joint Development Agreement and the learned Assessing Officer correctly assessed the same and consequently the provisions of section 263 of the Act is not applicable on the facts and circumstances of the case.

19. The appellant craves leave of this Hon’ble Tribunal, to add, alter, delete, amend, or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing.

20. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.

8.1 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that the issue raised in this appeal is identical as discussed in ITA No.415/Bang/2020 for the assessment year 2015-16. Applying the same ratio on both the legal issue and on merit of the issue, we are of the opinion that both the issues to be decided in favour of the assessee as held in AY 2015-16 in ITA No.415/Bang/2020. This appeal in ITA No.248/Bang/2021 is allowed.

9. In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on 2^nd Sept, 2022