2002-VIL-187-ITAT-PNE

Equivalent Citation: TTJ 088, 519,

Income Tax Appellate Tribunal PUNE

Date: 21.10.2002

SHANTI BUILDERS.

Vs

JOINT COMMISSIONER OF INCOME TAX.

BENCH

Member(s)  : S. C. TIWARI., I. P. BANSAL.

JUDGMENT

This appeal has been filed by the assessee on 11thApril, 2001, against the order of the learned CIT-I, Pune, dt. 27th March, 2001, under s. 263 of IT Act, 1961, in the case of the assessee for asst. yr. 1997-98. Facts of the case leading to this appeal, as gathered by us from the orders made by the income-tax authorities and the paper book filed by the assessee, briefly are that the firm M/s Shanti Builders was brought into existence by an instrument of partnership dt. 1st Feb., 1973. This firm comprised of 4 partners and 7 minors admitted to the benefits of partnership. The ratio of sharing profit and loss of the firm was agreed upon amongst the partners in the following manner:

S. No.	Name of the partner/minor admitted to the benefits of partnership	Share in profit	Share in loss
1.	Smt. Chandrabai Naraindas Choitirmal	20 %	20 %
2.	Mr. Bhagwan Naraindas. Choitirmal	20 %	20 %
3.	Mr. Narain Motiram Gidwani	20 %	20 %
4.	Mr. Satramdas Kiratrai Kripalani	3 %	40 %
5.	Master Naresh alias Ramesh Sajan Advani (Minor)	6 %	Nil
6.	Master Lachman Sajan Advani (Minor)	5 %	Nil
7.	Master Jai Doulat Advani (Minor)	6 %	Nil
8.	Master Lalit Doulat Advani (Minor)	5 %	Nil
9.	Baby Gitanjali Gul Advani (Minor)	5 %	Nil
10.	Baby Sangita Gul Advani (Minor)	5 %	Nil
11.	Master Prakash Parpati Advani (Minor)	5 %	Nil
		100 %		100 %

2. This firm purchased on 29th March, 1973, a property named Petit hall comprising of constructed bungalows and outhouses on land admeasuring 33,339 sq. mtrs., situated at Nos. 66 and 67, Civil Lines, Haveli, Pune, for a sum of Rs. 18,15,260. This property was purchased by the assessee-firm with the view to develop the plot as a builder. However, on account of a variety of reasons there was very little further activity on this plot of land. Inspecting Asstt. Commissioner (Acquisition) initiated proceedings for acquisition of this plot of land under Chapter XX-A of the IT Act by notification under s. 269D of the Act on 11th July, 1974. On 17th Feb, 1976, the Urban Land (Ceiling & Regulation) Act came into force in the State of Maharashtra. The assessee-firm submitted statement under s. 6(1) of ULC Act on 12th Aug., 1976. In this statement the assessee-firm mentioned that apart from income-tax acquisition proceedings, there was also PMT (Pune Municipal Transport) reservation on the plot of land. The assessee further mentioned in this statement that the land also stood mortgaged with the erstwhile vendors for securing the unpaid balance of the purchase price which stood at Rs. 9,07,630 at that time. The assessee-firm however claimed exemption under s. 20(1)(a) and 20(1)(b) of ULCA and also declared that the entire land was desired to be retained. At about the same time, the assessee also made declaration for exemption under s. 21(1) of ULCA. The assessee-firm filed the returns of income for asst. yrs. 1974-75 to 1976-77 (year ending 31st Dec., 1973 to 31st Dec., 1975) and also obtained registration of the firm under IT Act. Returns of income were not filed thereafter, presumably on account of absence of any activity. According to the assessee, after ULC Act came into force in Maharashtra, several disputes arose amongst the partners including civil suit filed by one of the partners Shri N.M. Gidwani and criminal complaints filed by other partners. In the meantime, the competent authority for Pune made on 28th March, 1978, order under s. 8(4) of the ULCA of 1976 "declaring the entire plot, land as vacant land and also rejecting the claim of the assessee-firm that each one of the 15 partners was entitled to hold land upto the ceiling limit of 1000 sq. mtrs. The competent authority however ordered that notification under s. 10(3) of the Act vesting the excess land in the State Government should not be issued till the assessee's exemption applications under s. 20 of the Act and declaration under s. 21 of the Act were finally decided. The assessee along with the vendor of the plot filed an appeal against the order of the competent authority before the collector and appellate authority for Urban Agglomeration, Pune. The appellate authority passed order on 20th Jan., 1979, dismissing the appeal filed by the assessee and vendor. Soon thereafter, the assessee's declaration under s. 21(1) of ULCA and applications under s. 20(1) of ULCA were also rejected by the orders passed by the respective authorities on 30th March, 1979, 2nd April, 1979, and 5th April, 1979. Final order was also passed on 8th April, 1979, acquiring the plot of land w.e.f., 15th May, 1979. Aggrieved by these orders, the assessee filed writ petition in Bombay High Court, being special civil application No. 1225 of 1979. Thereupon Hon'ble High Court by its judgment dt. 4th Oct., 1988, set aside the competent authority's order dt. 28th March, 1978, the appellate order dt. 28th Jan., 1979, and notification under s. 10 of ULCA, and remanded the proceedings to the competent authority to be kept pending till the hearing and final disposal of the applications under ss. 20 and 21 of ULCA. Subsequently, the Hon'ble High Court passed another order on 2nd Nov., 1988, in continuation of previous order dt. 4th Oct., 1988, whereby it was directed that the competent authority should initially proceed to make the requisite declaration under s. 8 of the ULCA and pass order under s. 8(4) thereof. The applications under ss. 20 and 21 should thereafter be taken up for consideration and determination. Thereafter, on 20th Jan., 1995, Collector, Pune, made an order under s. 126(4) of Maharashtra Regional & Town Planning Act, 1966, notifying that the following lands were needed for the public purpose of Pune Municipal Transport (bus parking, bus stand and bus station):

It has been mentioned by the learned CIT in the impugned order that even after the aforesaid order of Collector, Pune, for land being required for PMT an offer of Rs. 35 crores was received from Amar Builders in respect of the plot of land in question and Bali Ahuja also made some offer. The assessee received opinion from D.M. Harish vide letter dt. 26th Feb., 1996, that as the business purpose had been frustrated for about 20 years it was liable to capital gain. Therefore, on 18th April, 1996, Addl. Collector and Competent Authority. Pune Urban Agglomeration, Pune, passed the fresh order determining total non-vacant area admeasuring 27,330.34 sq. mtr. Out of remaining 6,009.07 sq. meters, the declarant was allowed ceiling unit, i.e., 1000 sq. mtrs. Thus the assessee was declared to be surplus holder to the extent of 5,009.07 sq. mtrs. only.

3. Eventually, this plot of land was sold by the partners of the firm in different groups to the developer named and styled as M/s Amar Avinash Associates in the following manner:

4. The original return of income on behalf of the firm for asst. yr. 1997-98 was filed on 23rd Oct., 1997 declaring total income of Rs. 14,89,92,775. This income was worked out as long-term capital gain chargeable-tax on sale proceeds of Rs. 28 crores received by Advani group and Choitirmal group on account of their agreements with the developer. In the note appended to this return of income, it was stated as under:

"The firm was formed in 1973 for developing property of 4, Sadhu Waswani Path, Pune. However, for last 24 years the firm could not carry on any business activity due to various Government reservations and restrictions. This being a single transaction of purchase and no business activity has been carried out by the firm, the sale proceeds are treated as capital receipts and income from capital gain is offered for taxation.

The partner of the firm Shri N.M. Gidwani has sold 20 per cent of his share in the property during the year. As the consideration is not known to the firm it is not included in above computation."

This return of income was processed under s. 143(1)(a) of the Act on 29th Dec., 1997, without any adjustment. Demand of Rs. 4,00,834 was raised on account of interest only after adjusting advance tax of Rs. 2,98,00,000. This demand was paid by the assessee on 20th Jan., 1998. However, an attachment order under s. 281B was passed on 16th Jan., 1998. Subsequently, a revised return of income was filed on 11th Feb., 1998. In this revised return capital gain arising out of consideration receded by Mr. N.M. Gidwani was incorporated. It was stated that the long-term capital gain of Rs. 18,41,97,000 arose on the consideration of Rs. 21 crores received by Gidwani group. But the entire capital gain was offset by deduction available on account of investments made under s. 54EB of the Act and, therefore, the total income of the assessee-firm remained unchanged at Rs. 14,89,92,770 as per the original return of income. This revised return of income was processed by the learned AO under s. 143(1B) on 20th Feb., 1998, and the revised intimation was issued. The AO rejected the assessee's claim of exemption under s. 54EB on the ground that the amounts reinvested in the scheme were in the name of Mr. N.M. Gidwani, partner, as individual. The benefit of this investment was not available to the assessee-firm. Thus, the learned AO raised the total tax and interest payable at Rs. 8,25,12,463 which included additional tax payable under s. 143(1A) amounting to Rs. 73,67,880. On 24th Feb., 1998, the AO also attached the investment in bonds made by Gidwani group with UTI. Thereafter, the assessee filed an application under s. 154 on 16th June, 1998, for rectification of revised intimation under s. 143(1B). This rectification application was rejected by the learned AO on 8th July, 1998. Thereafter, another return in the name of the assessee-firm was filed on 23rd Oct., 1998, signed by one Shri L.M. Gidwani who claimed himself as legal representative of the deceased partner Mr. N.M. Gidwani who had expired on 29th Nov., 1997. No evidence was enclosed to show that the signatory was the legal representative of the deceased partner and was authorised to file the return of income on behalf of the assessee-firm. Accordingly, that return was filed by the learned AO as non est. The learned AO initiated assessment proceedings by issue of notice under ss. 143(2) and 142(1) of the Act. He completed the assessment order under s. 143(3) on 5th April, 1999.

5. Certain actions were taken by the AO for protection of the interest of Revenue even before completion of assessment under s. 143(3) apart from intimation under ss. 143(1)(a) and 143(1B) as abovementioned. The AO passed the order under s. 281B on 16th Jan., 1998, whereby the plot of land was attached. On 24th Feb., 1998, the AO passed another order under s. 281B whereby he made attachment of the investments in bonds made by the group of the deceased partner Mr. N.M. Gidwani with UTI worth Rs. 5,23,11,629. On 2nd April, 1998, provisional attachment under s. 281B on land was lifted by AO with the previous approval of the CIT but on the same date he further attached investment bonds of the value of Rs. 8,73,80,371 thus bringing the aggregate value of bonds attached to Rs. 13,96,92,000.

6. While completing the assessment, the AO accepted, for the detailed reasons given in the office note appended to the assessment order, the claim of the assessee that income arising on transfer of development rights in the plot of land in question to M/s Amar Avinash Associates was chargeable to tax under the head "Capital gains". The learned AO, on the other hand, rejected the assessee's claim of deduction under ss. 54EA and 54EB amounting to Rs. 18,41,97,000. The AO also did not accept the contention of the assessee that for the purpose of working out capital gains chargeable to tax the indexed cost of acquisition as per market value on 1st April, 1981, should be determined at a sum of Rs. 12,90,15,000. According to him such indexed cost of acquisition correctly worked out to Rs. 68,62,500 only. Furthermore, the AO did not accept the assessee's contention of expenditure incurred in the form of compensation paid claimed at Rs. 2,77,95,225 and allowed deduction in this respect to the extent of Rs. 48 lakhs only. In this manner the learned AO worked out capital gains chargeable to tax at Rs. 47,82,39,890 from out of total sale consideration of Rs. 49 crore.

7. In view of the provisions of Chapter XX-C of the Act, Form 371 being statement under s. 269UC of the Act was filed by Choitirmal group on 23rd Sept., 1995, declaring apparent consideration of Rs. 14 crore. On the same day separate Form 371 under s. 269UC was filed by Shri S.K. Kripalani declaring apparent consideration of Rs. 14 crore. Both these statements under s. 269UC were made in relation to 40 per cent undivided interest each claimed to be belonging to them. On 11th Nov., 1995, appropriate authority issued no objection certificate in respect of the aforesaid statements under s. 269UC aggregating to 80 per cent undivided interest. On 22nd Feb., 1996, late Shri N. M. Gidwani filed statement under s. 269UC for the balance 20 per cent share for which appropriate authority issued no objection certificate on 27th May, 1996. On 29th Nov., 1997, Shri N.M. Gidwani expired.

8. The detailed reasons given by the learned AO in the office note for accepting that income was chargeable under the head "Capital gains" are as under:

Office Note

1. As regards payment to Amar Builders Rs. 40 lakhs and to Gargat & Co. Rs. 8 lakhs it was found that it is in connection with such transfer and incurred for and on behalf of the firm and, therefore, the same is allowed.

2. As mentioned in the order, the assessee-firm was formed in 1973 for developing property. However, for last 24 years the firm could not carry on any business activity due to various Government reservations and restrictions. Due to above reasons sale proceeds were treated by assessee as capital receipt and income from capital gain was offered for taxation as against business income. During assessment proceedings assessee was show-caused as why not the income so earned may be treated as 'business income' as initial intention was to buy the land, develop the land, construct house, and then sell it. In response to this show-cause, it has been submitted by the assessee, the gist of which is as under:

(A) The firm purchased property in Petit Hall, 4, Sadhu Waswani Path, Pune, on 29th March, 1973, out of advance from associate concern Shantinagar Builders and capital contribution of partners for total consideration of Rs. 9,54,486. The firm did not carry on any business activity from its inception.

The firm could not develop and sell Petit Hall property due to following reasons:

1. The property was acquired by Urban Land Ceiling authorities under Urban Land Ceiling & Regulation Act, 1976.

2. The property was reserved by Pune Municipal Corpn. for its Pune Municipal Transport bus depot.

3. There were differences in the partners which had stopped commercial activity of the firm. The partners could not carry out the objective of the firm because of the following:

(i) The property was acquired by Urban Land Ceiling authorities on 5th July, 1976. The order of Urban Land Ceiling authorities states that 'After examining the record of the file, the proposed public purpose for which the land is required and after examining the exemption application of M/s Shanti Builders under s. 20(1)(a) of the Urban Land (Ceiling and Regulation) Act, 1976, for construction of houses for weaker section of the society, I am satisfied that the said land is required for the public purpose of Chapter-III and Chapter-IV of the Urban Land (Ceiling and Regulation) Act, 1976, I, therefore, do not permit M/s Shanti Builders to continue to hold such land for the purpose of construction of houses for weaker sections of the society'. The order itself had compelled the partners to change the objective of the firm.

(ii) In addition to above the differences in the partners increased from 1976 had also compelled them to change the basic objective of developing Petit Hall property. The following communication amongst the partners substantiates the points:

(i) Letter of Mr. Kriplani dt. 9th Dec., 1976

(ii) Letter of Mr. Gidwani dt. 27th Dec., 1976

(iii) Letter of Mr. Kriplani to Mr. Gidwani dt. 11th Feb., 1977

(iv) Civil application filed by Mr. Gidwani in March, 1979

(v) Letter of Mr. Kriplani dt. 15th April, 1979

(vi) Copy of Writ Petition filed by N.M. Gidwani dt. 18th Feb., 1984

(vii) Notice of advocate of Mr. Kriplani dt. 17th July, 1989

(viii) Notice of advocate of Mr. Gidwani dt. 12th Aug., 1989

In 1996, the two partners have sold 80 per cent undivided portion of the land to M/s Amar Avinash Associates, Pune, for total consideration of Rs.28 crores and remaining 20 per cent portion was sold by Shri N.M. Gidwani for Rs. 21 crores. The firm has submitted original return on 23rd Oct., 1997, and revised the same on 13th Feb., 1998, offering income under the head income from capital gains(long-term).

The firm has offered income as long-term capital gain in the light of following decisions/discussions:

The following tests are indicated by Royal Commission Report, 1955, on Taxation of Profits and Income Tax for determining the nature of income:

1. The subject-matter of the realization—While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or, manufactured articles, which are normally the subject of trading, are only very exceptionally subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does.

2. The length of the period of ownership—Generally speaking, property meant to be dealt in is realized within a short time after acquisition. But there are many exceptions from this as a universal rule.

3. The frequency or number of similar transactions by the same person. If realizations of the same sort of property occur in succession over a period of years or there are several such realizations at about the same date, a presumption arises that there has been dealing in respect of each.

4. Supplementary work on or in connection with the property realized, if the property is worked up in any way during the ownership so as to bring it into more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large scale advertising, there is some evidence of dealing. For, when there is an organized effort to obtain profit, there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.

5. The circumstances that were responsible for the realization. There may be some explanation, such as sudden emergency of opportunity calling for ready money, the negatives the idea that any plan of dealing prompted the original purchases.

Motive—There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realized clearly that it can be inferred from surrounding circumstances, in the absence of direct evidence of the seller's intentions, and even if necessary, in the face of his own evidence.

The Supreme Court in the cases of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC) and Jankiram Bahaduram vs. CIT (1965) 57 ITR 21 (SC) had also laid down similar tests for determining the nature of transaction. The Court further held that the determination of adventure in the nature of trade is a mixed question of law and fact and has to be decided in the light of above tests.

(B) In the case of M/s Shanti Builders the objective of the firm is to carry business on the premises of Petit Hall, the firm couldn't carry on development activity either in the Petit Hall property or any other business transaction. This is isolated transaction which couldn't be materialized for more than 20 years itself answer the above tests as follows:

1. The subject-matter of realization is in the nature of landed property which is acquired by the firm to carry on business activity, however the firm couldn't carry on business activity either for the above-referred property or any other property due to reasons stated above. A transaction is not necessarily in the nature of trade because the purchase was made with intention to resell as decided in following cases:

(i) G. Venkataswami Naidu & Co. vs. CIT

(ii) CIT vs. Sutlej Cotton Mills Supply Agency Ltd. 1975 CTR (SC) 228 : (1975) 100 ITR 706, 711 (SC)

(iii) A.N. Seth vs. CIT (1969) 74 ITR 852 (Del)

(iv) ITO vs. Rani Ratnesh Kumari (1980) 123 ITR 343, 347 (All)

(v) CIT vs. Mrs. A. Ghosh (1981) 22 CTR (Cal) 318 : (1983) 139 ITR 119 (Cal)

(vi) CIT vs. Hindustan Industrial Agencies (P) Ltd. (1980) 17 CTR (Bom) 43 : (1982) 135 ITR 436 (Bom)

(vii) Jenkinson vs. Freeland (1961) 39 Tax Cases 636 (CA)

(viii) Radha Debi JaIan vs. CIT (1951) 20 ITR 176 (Cal)

(ix) India Nut Co. Ltd. vs. CIT (1960) 39 ITR 234 (Ker)

(x) Mrs. Sooniram Poddar vs. CIT (1939) 7 ITR 470, 476-9 (Rang)

(xi) Ajax Products Ltd., vs. CIT (1961) 43 ITR 297, 310 (Mad)

(xii) Gustad Dinshaw Irani vs. CIT (1957) 31 ITR 92 (Bom)

(xiii) Mrs. D.M. Alexander vs. CIT (1952) 22 ITR 379, 402 (Mad)

2. The firm has held that property for more than 23 years.

3. The firm has not carried on any business activity till today, i.e., frequency of transaction is nil.

4. The firm has not carried out any supplementary work in connection with the property sold.

5. The firm was required to sale the property. The firm couldn't develop the same due to various statutory limitations and differences in partners.

6. The motive of the partners at the time of purchase was no doubt to carry out business activity, however it is vanished due to various reasons over a period of time.

From the above it can be seen that the transaction carried out by Shanti Builders fulfils all the above tests and hence the income is not adventure in the nature of trade.

The mere circumstance that the purchase of property had been made with borrowed capital could not lead to the conclusion regarding intention of the purchaser. M.C. Cherian vs. CIT (1964) 51 ITR 631 (Mad).

I have considered assessee's argument. I have also gone through the communication amongst the partners as submitted by the assessee. On going through the correspondences, it is very clear that though initial objective was to develop the plot with a business motive, subsequently, and more precisely vide letter from Chhotirmal to Narain M. Gidwani, it is very clear that they have decided that no commercial activity will be carried out and it can be definitely said that it becomes an investment as against stock-in-trade after the property was acquired under ULC and disputes arose amongst the partners. The relevant extract of the communication of the above referred letter dt. 15th April, 1979, is reproduced as under:

'The property has been acquired under the Urban Land Ceiling Act, 1976, cannot be developed now and looking to your fraudulent activities and non-co-operative attitude we have decided, we shall not carry out any commercial activities of our firm Shanti Builders in which you are partner with immediate effect as we cannot continue to work together.'

It is also fact that no money has been spent for developing the above plot of land. No activity whatsoever has been carried out to show that any attempt has been made by the firm to develop the plot, construct flats and then sell it. I am, therefore, in agreement with the assessee's submission that though initial objective was to carry on business, subsequently, it becomes a capital asset and therefore, the transaction cannot be termed as adventure in the nature of trade and, therefore, the transaction has to be dealt with as per provisions of capital gain and not as business income. Similar view has been taken by Hon'ble Supreme Court in the case of Jankiram Bahadurram vs. CIT and in the case of Khan Bahadur Ahmed Alladin & Sons vs. CIT (1968) 68 ITR 573 (SC) also.

Joint CIT, Spl. Range 3, Pune"

9. Aggrieved by the assessment order as abovementioned, the assessee made revision petition under s. 264 to the CIT, Pune, on 17th Jan., 2000, against the disallowance of assessee's claim of deduction of expenditure to the tune of Rs. 2.28 crores in the computation of long-term capital gains. Thereafter, the assessee once against made another revision petition on 7th Feb., 2000, against denial of assessee's claim of deduction under ss. 54EA and 54EB of the Act to the extent of Rs. 18,41,97,000 from the amount of long-term capital gain. The learned CIT first proceeded with the assessee's revision petition filed on 7th Feb., 2000. During the course of hearing of this revision petition the assessee made the following submissions:

(a) The claim for investments made under ss. 54EA and 54EB is for Rs. 18,41,97,000. These investments are made by late Mr. Narain Gidwani for and on behalf of firm.

(b) A firm is not recognized as a separate legal person under common law and as such the investments of the firm can always be held in the name of partner. Under this case investments are held by the firm in the name of Mr. Narayan Gidwani.

(c) The sale of partnership property was made by three separate agreements entered into by three groups of partners and even separate 371 petitions were filed and respective certificates from appropriate authority were obtained. If the income out of these agreements is considered to be taxable in the hands of the firm the corresponding investments by the partners for benefit under ss. 54EA & 54EB are also to be given effect to, even though separately made by one of the partners.

(d) The other two groups of partners have filed revised return of income in February, 1998, claiming deductions for the investments of Rs. 18,41,97,000. On denial of deductions for the investments so made they have also filed applications under s. 154. Under these circumstances it cannot be said that there is no authorization for these investments by other partners.

(e) On consideration of above facts the investments made under ss. 54EA and 54EB should be allowed as deduction in the hands of the firm.

(f) Once the investments are considered in the hands of the firm the question of income out of these investments becomes relevant. This has to be considered in the light of following facts:

(i) All the investments are made after 31st March, 1997, and, as such, the question of income on these investments is not relevant for asst. yr. 1997-98 and for the purposes of present application under s. 264.

(ii) Mr. Narain Gidwani died in November, 1997, and from the date of his death he ceases to be partner by the provisions of partnership deed. Hence, the income from investments at the most can be considered only till the date of his death.

(iii) The other two groups of partners had filed Special Civil Suit No. 262 of 1999 in the Court of the Civil Judge, Senior Division, and a Court compromise was made in the said Court on 24th June, 1999, whereupon all the disputes between other two groups of partners and legal heirs of Narain Gidwani were settled fully and finally. Under the terms of said compromise cl. 15 the defendants, i.e., legal heirs of Narain Gidwani alone have to pay tax on income out of these investment. Accordingly, the legal heirs have paid their respective share of taxes.

(g) Considering this the income out of investments made under ss. 54EA and 54EB is to be determined till 29th Jan., 1997, being date of death of Mr. Narain Gidwani. The tax payable on this income is to be determined after giving credit for the taxes paid by legal heirs in the individual capacity."

The learned CIT I, Pune, decided the assessee's revision petition dt. 7th Feb., 2000, as above enumerated in the following words:

"Facts and submission made are verified. It is an admitted fact that investment in specified assets has been made to the extent of Rs. 19,24,67,500 out of sale consideration, received by Shri N.M. Gidwani for land at 4, Sadhu Waswani Path, Pune 1. The investment is in the name of Shri N.M. Gidwani. All the investments are made in units of UTI and other mutual funds in joint name as Savitri R. Jagtiani, Pushpa K. Malkani, L.M. Gidwani, Sundari G. Adwani and P.H. Adwani. Except Shri N.M. Gidwani, others are not partners in the firm of M/s Shanti Builders. The investments are made within the prescribed time. The investments are in the name of one partner. The firm has no separate legal existence from partners under general law. The income or investment is always in the name of one or more partners. In this case the investments made are out of the sale proceeds of the assets of the firm, i.e., M/s Shanti Builders. The sales proceeds were separately appropriated by the partners and utilized by them. As regards disputes amongst partners of three groups, those are not relevant for tax proceedings. The entire property has been held as belonging to the firm by the AO. AO has accordingly brought to tax the capital gain in the hands of the firm. This position has now become final. Naturally, the consequences of this action of AO should follow. Accordingly, the investments made by Shri N.M. Gidwani have to be considered as investments of the firm/investments made on behalf of the firm. Ultimately, all partners in three groups offered total sales proceeds for taxation in the hands of firm.

Considering submissions of the assessee, the AO is directed to hold the investment made by Shri N.M. Gidwani, partner, as investments of the firm and allow deduction under ss. 54EA and 54EB of the IT Act, 1961, accordingly.

As regards taxability of income arising out of the investment, the AO is directed to tax it in the year of receipt in the hands of the firm."

10. As pointed out earlier, the assessee had filed two applications under s. 264 on 17th Jan., 2000 and 7th Feb., 2000, respectively. The assessee's application filed on 7th Feb., 2000, was decided by the learned CIT as per his order dt. 28th March, 2000, as detailed in foregoing paragraph. The assessee's petition dt. 17th Jan., 2000, however remained pending. The successor CIT issued on 10th Jan., 2001, a notice under s. 263 as he held the view that the AO completing the assessment by treating the income arising to the assessee as capital gains was incorrect. According to him he issued notice under s. 263 for intimating the assessee the decision to invoke the provisions of s. 263 for setting aside the assessment with directions to the AO to redo the assessment and treat the income as business income. According to the learned CIT the main contentions of the assessee during the course of proceedings under s. 263 were as under:

"(A) While giving no objection certificate under s. 230A, the Dy. CIT had not only consulted but had obtained the permission of the Hon'ble CIT, Pune, with respect to the taxability of the said amount;

(B) The Dy. CIT had passed orders and had provisionally attached the land under s. 281B;

(C) Order under s. 143(3) had been passed after application of mind;

(D) Order was subjected to revision under s. 264;

(E) Order was subject to proceedings under s. 154;

(F) Even on merits, the assessee submits that the order is neither erroneous nor prejudicial to the interests of the Revenue."

11. The learned CIT took note of the facts of the case and detailed chronology of events, from 29th March, 1973, to order under s. 264 made by his predecessor on 28th March, 2000, as enumerated in Annex. 'A' of the impugned order. According to him the partnership deed of the firm M/s Shanti Builders dt. 1st Feb., 1973, and provisions of Partnership Act were of foremost importance. Under the Partnership Act all transactions entered into by a firm would be transactions in the course of business in the nature of trade. There could not be two opinions on this. The provisions of partnership deed of the assessee-firm made it clear that the firm was constituted, among other things to carry on business as "dealers in lands". This aspect was borne out from the preamble in the partnership deed and the mention of "etc." in cl. 6 of the partnership deed. The learned CIT also took note of the fact that under the provisions of the partnership deed the firm is distinguished from its members and during the subsistence of the firm no partner could claim any part of the firm's property as his individual property. This position of law was borne out by the provisions of ss. 9, 14 and 15 of Partnership Act as well as the following judgments:

(a) Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1906 SC 1300

(b) CIT vs. Ambar Corpn. (1974) 95 ITR 178 (Raj) and CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC)

(c) Ajudhya Prasad Ram Prasad vs. Shamsundar AIR 1947 Cal 13 and Mohd. Abdul Sattar vs. State of Andhra AIR 1958 AP 558

Clauses 3, 8, 9, 10, 11, 12 and 13 of the partnership deed as well as ss. 7, 39, 40, 43, 44 and 46 of Partnership Act established that the act of the partners in case of the assessee-firm in selling the partnership assets in group of 40 per cent, 40 per cent and 20 per cent was an act prohibited by the Partnership Act itself. Even if sold separately, the fund would belong to the firm. The partners could not have sold it on their own as the property was not their personal property since they had not dissolved the partnership as provided in the law. In the case of the assessee-firm there was no dissolution of partnership nor had the accounts been settled in view of any dissolution of the partnership. Since the original asset purchased by the firm was trading asset for the purpose of business it retained the character of a trading asset unto the date of sale in 1996. The learned CIT placed reliance on the judgments in cases of CIT vs. Bharath Auto Stores (1990) 90 CTR (Mad) 177 : (1991) 188 ITR 477 (Mad) and ALA Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC).

12. The learned CIT also referred to the property cards. He held that the property was incorrectly registered in the name of only 4 partners of the firm. However, it was evident from the notings of the Sub-Registrar's office on the property cards that the property was purchased as a partnership property and not as belonging to the individuals either single or in groups. The registration of the property should have, therefore, been in the firm's name alone. At any rate there was no occasion to dissolve the firm nor was such dissolution done and as such the property could not have been held by the partners individually.

13. The learned CIT then referred to the assessments in the case of the assesses for earlier assessment years and described the position found in para 38 of impugned order in the following words:

"It is also essential to understand the basic nature of business of the assessee and how the asset has been accounted for. From the documents submitted, it is seen that for the accounting period ended 31st Dec., 1974, (Annex. 'D' attached to this Order 4) relevant to the asst. yr. 1975-76 the firm M/s Shanti Builders showed the plot as stock-in-trade in the balance sheet to the extent of Rs. 9,54,456 and also showed deposit from purchasers Rs. 1,40,000 as a liability. The P&L a/c for that period showed misc. expenses like salaries and wages, telephone, rent and taxes, etc. totalling to Rs. 4,191 and the loss was apportioned amongst the four major partners. As regards the year ended 31st Dec., 1975, (Annex. 'E' attached to this order) the assessee showed telephone refund of Rs. 3,114, rent of Rs. 5,193.92 and grass cutting income of Rs. 500, and against this, the expenditure debited was salaries, general expenses, etc. The income of Rs. 6,776 was divided amongst the partners. The plot was also shown as stock-in-trade in asst. yr. 1975-76 and the collection being deposit from purchasers Rs. 1,35,000 was shown as a liability. The main loan was from M/s Shantinagar Builders to the extent of Rs. 8,02,200. The capital introduced by the partners was very nominal."

The learned CIT also took note of the fact that in the initial years the assessee had paid only sum of Rs. 9,54,486 as against the entire cost of the plot at Rs. 18,50,260. According to him the assessee was asked to produce the bank account of the firm but the assessee only produced a letter from Dena Bank, Colaba Causeway, Bombay, dt. 8th Feb., 1977, informing M/s Shantinagar Builders that the bank had received the letter from Shri N.M. Gidwani instructing to revoke the instructions about operating the account and that the partners could not be allowed to operate the account unless and until fresh instructions were received signed by all the partners. According to the learned CIT this letter pertained to M/s Shantinagar Builders and not the assessee-firm. The assessee had purposely not produced the details of the bank accounts although specifically asked for during the proceedings under s. 263. Enquiry should have been conducted by the AO as to the operation of the bank account and its relevance to the income earned by the firm.

14. The learned CIT did not accept the arguments of the assessee that while issuing certificates under s. 230A and attachments of the property under s. 281B, and subsequent withdrawal of attachments under s. 281B, the CIT granted approval to the findings of the AO in the assessment order that income was chargeable to lax under the head "Capital gains". While dealing with 230A certificate, the AO could only restrict himself to the extent of existing tax liability payable by the assessee and no further. The correspondence in this respect could not give rise to an inference that the then CIT had given his approval for adopting a particular stand while framing the assessment, 15 months later. Similarly, in relation to attachment and withdrawal of attachment under s. 281B, the CIT only applied his mind to the limited issue before him relating to recovery of taxes. The assessee's argument that the then CIT was aware and had applied his mind to the issue of taxing the income as capital gains was totally incorrect.

15. The learned CIT also did not accept the contention of the assessee that the successor CIT could not resort to proceedings under s. 263 when his predecessor had passed an order under s. 264 treating the receipts as capital gain by way of allowing the assessee deductions under ss. 54EA and 54EB. According to him the assessee (sic-AO) had not considered the issue in the proper perspective. The AO had refused to allow the deduction as the investments had been made in the individual name of the partner and not in the name of the firm. Petition under s. 264 was only for limited issue for claiming the deduction under s. 54EA/EB. The issue as to whether income should be taxed as capital gain or it should have been taxed as business income was not before the CIT. The CIT had used the words, "natural consequence of this action should follow" meaning that once the AO had considered certain receipt as capital gains of the firm, then the investments made should be considered as the investments made by the firm although they may stand in the name of another partner. The CIT's intention in using the words 'this position has become final' was only to indicate that there was dispute among the partners of 3 groups, each group selling its share and later' on the entire property had been held as belonging to the firm by the AO. This position, therefore, reached finality that the total income belonged to the firm. The term 'final' did not indicate that the then CIT concurred with the view of the AO that the income was in the nature of capital gain alone and not business income. For this reason the learned CIT also found the judgments Chunnilal Onkarmal (P) Ltd. vs. CIT (1996) 135 CTR (MP) 1 : (1997) 224 ITR 233 (MP) and CIT vs. Vippy Solvex Products (P) Ltd. (1997) 228 ITR 587 (MP), relied upon by the assessee to be distinguishable. For similar reason the learned CIT also did not see force in the contention of the assessee that the assessee having been permitted to withdraw its appeal, the assessment order could not be a subject to s. 263 as the issue had been considered by the CIT(A). The issues before CIT(A) were also limited only to the benefit of s. 54EA/EB. Hence, there was no question of merger as far as the issue in the proceedings under s. 263 was concerned.

16. The learned CIT did not see any force in the contention of the assessee that the AO had applied his mind while finalizing assessment order under s. 143(3) on 5th April, 1999. The basis on which the assessee had contented that income was chargeable to tax under the head "Capital gain" and not under the head "Profits and gains of business or profession" was not justified. In view of the position of the facts mentioned in the partnership deed and the sequence of events that took place, the following observations and conclusions were material in determining the nature of the assessee:

(i) The subject-matter of realization is in respect of vast area of land which the assessee had intended to use for the purpose of construction of flats, hospital and even a college. The assessee had not purchased the land for enjoyment or for personal use but with an intention to conduct business thereon as per the partnership deed and its contents. The extent of the land and the intention in acquiring it are sufficient to label the land as a trading asset and not as a capital asset.

(ii) The period of ownership of the land was on account of the delay in disposal of the litigations under the ULC Act and even before the final outcome of the litigations, the assessee showed indications' of disposing off the development rights therein.

(iii) The frequency of similar transactions was reduced to the minimum only because of the ULC Act and the alleged internal squabbles amongst the partners.

(iv) There was an initial supplementary work done on the plot on account of which a bungalow was demolished and the assessee had also claimed that plans for construction activity was submitted to the corporation for approval. Also the balance sheet showed that deposits were collected from the purchasers in the initial period. Again, the only hindrance was the ULC Act and the proposed PMT reservations.

(v) There was no emergency for ready money since the assessee had waited from 1973 to 1996 for clearing the title of the land and it could have waited for some more time for constructing the flats which it failed to do, again on account of the lack of unity amongst the partners. However, it could sell the developmental rights in the property at a substantially high margin.

(vi) The motive behind holding the asset throughout was that of a business asset and a trading asset. Nowhere did the assessee change this character of the property. Merely because the title was subject to the restrictions contained in the ULC Act does not mean that the asset became a capital asset.

(vii) The transaction is, therefore, in the nature of trade and the purchase was made with the intention to treat it as a business asset."

In view of the above, the learned CIT held the firm view that the land was purchased in 1973 for the specific purpose of construction of flats and conducting allied activities of dealing in real estate business. The same land sold in 1996 was only the nature of trading asset and the gains arising there-from were nothing but 'Profits and gains from business or profession'.

17. According to the learned CIT the AO while completing the assessment under s. 143(3) had not considered the following facts:

"(i) The nature of the land being sold is basically a trading asset.

(ii) The character of the land being that of a trading asset right upto the end.

(iii) The intention of the firm in holding the asset is to earn profits.

(iv) The risk taken by the assessee-firm throughout this period shows the inherent nature of a business activity.

(v) The eagerness with which the partners faced the litigations and the constraints brought about by the ULC Act and the PMT shows their intention to maximise their returns by holding on to the property inspite of ULC restrictions. They could dispose off land except the surplus land under the ULC Act and this Act did not prevent them from conducting business. They could have utilised the full FSI.

(vi) The lack of intention to dissolve the firm as per statutory provisions inspite of so-called internal disputes. The aggrieved partner could have retired from the firm and the whole asset could have been distributed amongst the partners.

(vii) The illegality exhibited by the transactions especially by groups of partners claiming a percentage of the asset as their property although such proposition is prohibited by law as laid down by the Supreme Court in the case of Addanki Narayanappa vs. Bhaskura Krishnappa and CIT vs. Devas Cine Corpn. cited above in para 21 and also as per the provisions of partnership deed as brought out in para 21 and paras 18 to 20.

(viii) The illegality again exhibited by the partners in disposing off such so-called shares in the property without consulting the other partners and without the legal sanction. Such sale being for and on behalf of the firm alone.

(ix) The attempt to dispose off the development rights inspite of the prohibitions imposed by the ULC Act, and

(x) The illegality shown by not offering to tax the sale proceeds in the firm's case although in view of the partnership deed and the sale being on behalf of all the partners, the profit earned should have been brought to tax as income from business or profession of the firm."

18. Thus, the action of the AO in treating the income as income from capital gains was erroneous and prejudicial to the interest of Revenue. The learned CIT held that he was entitled and justified in exercise of the powers under s. 263 in the instant case. For this purpose, he relied upon a number of Court pronouncements enumerated in the impugned order. Finally, the learned CIT summed up his case in the following words:

"I have considered the facts of the case in its entirety and the decisions regarding action under s. 263 quoted by the assessee before arriving at a final conclusion and I am satisfied :

(i) That the assessment order under s. 143(3) dt. 5th April, 1999, is basically an erroneous one and prejudicial to the interest of Revenue, since the AO erred in treating the income as income from capital gains instead of considering the same as profits and gains from business or profession.

(ii) That the loss to the exchequer due to the incorrect application of law resulting from the lack of proper analysis of facts and its legal implications as discussed earlier, amount to the assessment being erroneous and prejudicial to the interest of Revenue, following the Supreme Court's decision in case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC).

(iii) That there was prima facie material on record to show that tax which was lawfully exigible had not been imposed or that by application of relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed as held in the case of CIT vs. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom).

(iv) That the above analysis now making the facts clear and evident, there is no question of any direction to the AO being vague as pointed out to be essential in the case of Garden Silk Mill vs. CIT (1996) 135 CTR (Guj) 399 : (1996) 221 ITR 861 (Guj).

(v) That the power under s. 263 being of a very wide amplitude and if a prima facie opinion is formed that the order is erroneous and prejudicial to the interest of Revenue, then a valid action under s. 263 can be ordered as held in the case of CIT vs. Seshasayee Paper & Boards (2000) 242 ITR 490 (Mad).

(vi) That the error in taxing the sale proceeds of the land held as business asset as income from capital gains instead of taxing it as income from business or profession, has been brought out and specific directions are given to the AO for correcting the error as required in the case of CIT vs. Shakti Charities (2000) 160 CTR (Mad) 107 : (2000) 244 ITR 226 (Mad).

(vii) That the powers under s. 263 have been considered with reference to the broad guidelines contained in the decision of Supreme Court in CIT vs. Shri Manjunatheshware, Packing Products & Camphor Products (1998) 231 ITR 553 (SC) which has brought out the full powers of CIT under this section.

From the above facts, it clearly proves that:

(i) The assessee-firm as per cl. 6 of the partnership deed and with special reference to the preamble was authorized to deal, inter alia, in lands, plots, etc. Please refer to paras 13 and 14 which bring out this particular proposition.

(ii) The property was purchased out of partnership funds as evidenced by cl. 3 of the partnership deed, that the capital was contributed by the partners and none of the partners could deal with the property as his individual asset. The property was the firm's asset only and none of the partners could claim any specific share in it. The assessee was a firm engaged in business as discussed in para 8 of this order and supported by cls. 1, 2 and 6 of the partnership deed brought out in paras 8, 11 and 13 of this order.

(iii) The accounting entries also show the intention of the assessee-firm in holding the Petit Hall land as stock-in-trade. The asset was a trading asset and there was no evidence to show that the character of the property changed from a trading asset to a capital asset. Also legally, as mentioned in foregoing paragraphs, the nature of the asset remained the same till it was sold in 1996.

(iv) Merely because ULC Act prohibited the assessee from constructing flats thereon for the weaker section did not change the basic character of the land from a business asset into a capital asset. The total holdings of the assessee were 33,339 sq. mtrs, out of which only 5,009 sq. mtrs., were declared as surplus under the ULC Act, without affecting the total FSI available. The assessee could, therefore, deal with the land which was not declared as excess and could conduct business. There was no restriction in this respect. Also the subsequent ease with which the purchaser could purchase the land from the firm and start construction activity after 1996 on the land shows that the provision of the ULC Act did not prohibit the assessee from carrying out construction activity or even sell the land which is within the limits prescribed under the ULC Act subject to the satisfaction of the provisions of the Act.

(v) Even the sale of the land if it is done by the partner, such a transaction will only be on behalf of the firm. None of the partners could claim any specific share of the asset as his own. The asset belongs to the firm and held by it as a business asset only. In addition, reference may be made to paras 13 to 21 of this order.

The AO has overlooked the above facts and as well as the law of theland and passed the assistant order which is prejudicial and erroneous in the interest of Revenue inasmuch as the AO failed to consider the facts, circumstances and the legal position, and as such the assistant order passed by the AO under s. 143(3) dt. 5th April, 1999, is hereby set aside with directions to the AO to consider all the facts mentioned in the above order and other material which may come to his notice during the course of investigation and to pass a fresh assessment order bringing to tax, the total sale proceeds subject to any legally allowable expenditure under the IT Act, 1961, as income from profits and gains of business or profession in respect of the land belonging to the firm."

19. During the course of hearing before us, Shri L.S. Dewani, the learned counsel of the assessee, challenged the impugned order under s. 263 of the learned CIT both on the ground of jurisdiction as well as on merits. In regard to the jurisdiction of the learned CIT to invoke the provisions of s. 263, the learned counsel submitted that, in the first instance, the assessment order was made by the AO under the close supervision of then CIT. Secondly, the AO had made the assessment order after complete application of mind and the order under s. 263 was nothing but substitution by the learned CIT of his opinion for the findings and conclusions arrived at by the AO after looking into all aspects of the matter. Thirdly, as the assessment order made by the AO under s. 143(3) on 5th April, 1999, had been subject to revision order under s. 264 by the learned CIT on 28th March, 2000, it was no longer open to the subsequent CIT to invoke the provisions of s. 263. These basic contentions were elaborated by the learned counsel of the assessee in the manner briefly mentioned hereinafter.

20. Elaborating the contention that the assessment order under s. 143(3) had been made by the AO under the close supervision of the then CIT, the learned counsel of the assessee pointed out that Advani and Choitirmal groups applied for clearance certificates under s. 230A of the IT Act in June, 1997. Certificates were granted to them on 22nd Sept., 1997, after exchange of some correspondence. At that stage itself the Department had raised the question as to why sale proceeds should not be treated as business income instead of resulting into capital gains proceeds should not be treated as business income instead of resulting into capital gains. The learned counsel referred to the letter of Shri S.H. Surana, chartered accountant, dt. 14th Aug., 1997, at assessee's paper book, Vol-I, p. 230. Further, with a view to protect the Revenue in respect of differential amount of tax a provisional attachment under s. 281B was made on 11th Feb., 1998. For this purpose, the AO had addressed letter dt. 24th Dec., 1997, to the then CIT-I, Pune, and received his approval by way of letter dt. 16th Jan., 1998. Thereafter, an order under s. 143(1B) was made on 20th Feb., 1998. In this order the exemption claimed by the assessee under ss. 54EA and 54EB amounting to Rs. 18,41,97,000 was disallowed and huge demand of Rs. 5,23,11,629 was raised. For the purpose of recovery of this demand, a notice under s. 226(3) was issued to UTI on 24th Feb., 1998, and the investment bonds made by Gidwani group were attached. Another proposal under s. 281B was made by the AO in this context and approved by the CIT on 31st March, 1998. Simultaneously, the provisional attachment made by the AO of land earlier vide order dt. 11th Feb., 1998, was lifted and that too had been approved by the CIT by his letter dt. 31st March, 1998. Thereafter, the AO also made a proposal for continuation of attachment under s. 281B on 29th Sept., 1998, as the provisional attachment earlier made was valid only for 6 months. After completion of assessment under s. 143(3) on 5th April, 1999, the AO addressed a letter to the then CIT, Pune, on 13th April, 1999. The learned counsel, referred to the complete copy of this letter at pp. 16 to 18 of the paper book, Vol. 111. In this letter, the AO recounted the history of the earlier attachment orders under s. 281B as well as 226(3) and proposed for lifting of attachment in view of the payments of, demand made by the assessee as well as the cheques received from Unit Trust of India on 12th April, 1999, aggregating Rs. 5,65,73,437. The learned counsel for the assessee argued that CIT was all along in the know of the matter on account of the AO apprising him of the developments from time to time. Even the question of assessment of profits under the head "Capital gains" was discussed by the AO with the then CIT before completion of assessee placed special emphasis on para 3 of the AO's letter dt. 13th April, 1999, addressed to the CIT, Pune-I. The learned counsel for the assessee pointed out that the proposal of the AO to lift prohibitory attachment made by aforesaid letter dt. 13th April, 1999, was promptly accepted by the CIT-I, Pune, vide his letter dt. 19th April, 1999, wherein the CIT specifically recorded his agreement with the findings of the AO in view of the fact that since 1979 there had been no developments. The learned counsel for the assessee argued that initially the Department took the stand that sale proceeds of the property were chargeable to tax as business receipts and proceeded to protect the interests of Revenue by way of attachment under s. 281B. After examining the facts and circumstances of the case closely, the Department came to the conclusion that assessment as capital gains was the right course of action even though the AO maintained that exemption under s. 54EA/54EB was not available as the investments had been made in the individual names of the parties. The AO finally formed his view in respect of assessability under the head "Capital gains" only after the then CIT concurred. Furthermore, the detailed reasons recorded by the AO for accepting capital gain income in the office note along with the assessment order under s. 143(3) were also forwarded by the AO to the CIT immediately on completion of assessment order under s. 143(3). The learned counsel for the assessee argued that it was the matter of record that the view taken by the AO in the assessment order under s. 143(3) had the consent of the then CIT, Pune. Such an order could not be revised by subsequent CIT for the reason only that he held a different view from that of his predecessor CIT. In support of this argument, the learned counsel for the assessee placed reliance on the decision of Tribunal, Mumbai Bench 'A', in the case of Savani Transport Ltd. vs. Dy. CIT (1997) 60 ITD 513 (Mumbai); of Pune Bench in the case of J.R. Agrawal vs. Dy. CIT (2000) 67 TTJ (Pune) 72 : (2000) 75 ITD 270 (Pune); of Bombay Bench in the case of Trustees of Parsee Panchayat Funds & Properties vs. Director of IT (Exemption) (1996) 55 TTJ (Bom) 605 : (1996) 57 ITD 328 (Bom) and the judgment ofHon'ble Calcutta High Court in the case of CIT vs. Hastings Properties (2001) 171 CTR (Cal) 626 : (2002) 253 ITR 124 (Cal).

21. The learned counsel then argued that once the CIT had made an order under s. 264 in respect of an assessment order under s. 143(3), it was no longer open to the CIT to invoke his jurisdiction under s. 263 of the Act. He argued that such position is inbuilt in the language of s. 264 itself. The provisions of s. 264(1) clearly mandate that they do not apply to an order to which s. 263 applies. In other words the CIT excludes the application of provisions of s. 263 when he decides to make an order under s. 264. In the instant case the learned CIT passed an order under s. 264 on 28th March, 2000. By virtue of that order the learned CIT-I, Pune, ruled out the possibility of application of s. 263. In this view of the matter it was simply not open to the subsequent CIT to act under s. 263 in respect of the assessment order in question. As a consequence of revision under s. 264, the assessment order no more survived for action under s. 263. The learned counsel for the assessee argued that as a matter of fact the subsequent CIT had by the impugned order under s. 263 interfered with the order of his predecessor under s. 264 and superimposed his view on the view taken by the predecessor. The order under s. 264 as made by the CIT in March, 2000, could not have been made without first admitting that the assessee's income was chargeable to tax under the head "Capital gains". There was no question of any deduction under s. 54EA/54EB if it was a business income and not capital gains. Thus, before allowing the assessee benefit of deduction under these provisions, the learned CIT satisfied himself that income had been correctly charged to tax under the head "Capital gains". The counsel argued that as a matter of fact the learned CIT did carry out this exercise while making his order under s. 264 and duly recorded his findings that there was no business carried out by the assessee in respect of the property in question in the body of his order under s. 264 itself in para 3. He clearly recorded that due to dispute and subsequent developments no business was carried out and ultimately the property was sold for a sum of Rs. 49 crore. Thus, even during the course of order under s. 264 the learned CIT after verifying the facts and applying his mind came to the conclusion that the income had been correctly charged under the head "Capital gains" as the assessee had not carried out any business in respect of the property. On these facts further order under s. 263 made by the subsequent CIT was unjustified, unwarranted and devoid of any jurisdiction. The learned counsel further argued that after receipt of the order under s. 264 dt. 28th March, 2000, the learned AO had passed a consequential order on 20th April 2000, to give effect to the order under s. 264. Thus, the assessment order made under s. 143(3) in April, 1999, merged in the order under s. 264 made by the CIT in March, 2000, and as on the date when the impugned order under s. 263 was made by the successor CIT, the only order which subsisted was the merged order dt. 20th April, 2000. Such an order was not susceptible to revision under s. 263 at all. In support of this contention the learned counsel for the assessee placed reliance on the following judgments:

(a) Chunnilal Onkarmal (P) Ltd. vs. CIT

(b) CIT vs. Vippy Solvex Products (P). Ltd.

(c) CIT vs. K.L. Rajput (1987) 59 CTR (MP)(FB) 65 : (1987) 164 ITR 197 (MP)(FB)

(d) Collector of Customs vs. East India Commercial Co. AIR 1963 SC 1124

(e) Bhagwandas Kevaldas vs. N.D. Mehrotra (1959) 36 ITR 538 (Bom)

(f) Gopal Chandra Sen vs. ITO (1963) 50 ITR 87 (Cal)

(g) Kunhayammed & Ors. vs. State of Kerala & Anr. (2000) 162 CTR (SC) 97 : (2000) 245 ITR 360 (SC)

(h) Ambabai & Ors. vs. Gopal AIR 2001 SC 2003

(i) Festo Elgi (P) Ltd. vs. CIT (2000) 158 CTR (Mad) 134 : (2000) 246 ITR 705 (Mad)

Elaborating still further on the doctrine of merger, the learned counsel for the assessee argued that the order merges as a whole and wherever intended otherwise legislature had provided for it. He placed reliance on the Supreme Court judgment in the case of Hindustan Aeronautical Ltd. vs. CIT (2000) 160 CTR (SC) 524 : (2000) 243 ITR 808 (SC) in this respect. The theory of merger applied even where subject-matter was decided by necessary implication. On the doctrine of merger there was no difference between an order in revision or appeal. For this, reliance was placed on the judgment CIT vs. Eurasia Publishing House (P) Ltd. (1998) 232 ITR 381 (Del); AIR 1970 SC 1 and Kunhayammed & Ors. vs. State of Kerala & Anr.. The learned counsel further argued that once an order was passed by the AO implementing the order passed by the CIT in revision, the same could not be revised under s. 263 unless the AO made any mistake in carrying out the directions given. For this purpose reliance was placed on the judgment of Hon'ble Bombay High Court in Brihan Maharashtra Sugar Syndicate Ltd. & Anr. vs. P.R. Joglekar, Dy. Commr. of Agrl. IT & Ors. (1987) 64 CTR (Bom) 51 : (1987) 165 ITR 279 (Bom).

22. The learned counsel for the assessee argued that while making the assessment under s. 143(3) the AO had considered all the facts and the circumstances of the case in judicial manner and arrived at his conclusion in a proper manner. It was not that the AO was oblivious of the question of assessment as business income. He applied his mind as to whether the income should be assessed as business income or as capital gains and recorded detailed reasons by way of office note. The learned CIT had in the impugned order only disputed that the inferences drawn by the AO were not correct. He had not pointed out a single fact which was not taken into consideration by the AO. On the same facts if the AO arrived at conclusion in a judicial manner, it was not open to the CIT to revise the same merely because he took a different view of the matter. In support of this contention the learned counsel placed reliance on the following judgments.

(i) CIT vs. Gabriel India Ltd. (1993) 202 ITR 108 (Bom)

(ii) CIT vs. Ratlam Coal Ash Co. (1987) 65 CTR (MP) 305 : (1988) 171 ITR 141 (MP)

(iii) Babu Lal Grandsons Family Trust vs. ITO (1989) 31 ITD 52 (Del)(SB)

(iv) Jai Commercial Co. Ltd. vs. Jt. CIT (2000) 66 TTJ (Del) 731 : (2001) 76 ITD 65 (Del)

(v) Mannesmann Demag A.G. vs. Dy. CIT (1995) 53 ITD 533 (Del)

(vi) Patel Cotton Co. vs. Asstt. CIT (1998) 64 ITD 273 (Mumbai)

(vii) Gwalior Rayon vs. J.C. Luther (1995) TLR 763 (Bom)

(viii) Fettachand Jain vs. IAC (1997) 57 TTJ (Pune) 341 : (1997) 60 ITD 47 (Pune)

(ix) Sandavik A.B. Sweden vs. IAC (1996) 55 TTJ (Pune) 144 : (1996) 56 ITD 330 (Pune)

(x) Jhulelal Land Development Corpn. vs. Dy. CIT (l996) 56 ITD 345 (Bom)

(xi) S.R. Venkatraraman vs. Union of India AIR 1979 SC 49

(xii) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC)

(xiii) 56 ITD 173 (Mumbai) (sic)

23. The learned counsel for the assessee argued that the impugned order under s. 263 made by the CIT was bad in law for want of jurisdiction to invoke the provisions of s. 263 of the Act and, therefore, liable to be quashed. Without prejudice to this contention the learned counsel further argued that the impugned order was liable to be quashed also for the reason that the assessment order under s. 143(3) made by the AO on 5th April, 1999, was, on merits fully justified. From the facts of the case it was patent that the only intention of the assessee-firm in relation to the immovable property purchased by it was to develop the same by way of construction of multi-storey buildings on the plot of land and to resale the flats thus constructed in the multi-storey buildings. However, immediately after the purchase of the property there were number of developments which thwarted the assessee from carrying out the purpose for which the property was purchased in the first instance. The said developments were as under:

(i) The assessee came to know about the reservation of the plot for Pune Municipal Transport under the provisions of Maharashtra Regional Town Planning Act, 1966. The said reservation was continued in the revised development plan of Pune Municipal Corpn. that came into force w.e.f., 1987. Pune Municipal Transport made an application to the Government under s. 126(1) of the said Maharashtra Act for acquiring the said lands. The final notification under s. 126(4) of the Maharashtra Regional Town Planning Act, 1966, was also issued on 20th Jan., 1995, for acquiring the property for the public purpose of Pune Municipal Transport (bus parking, bus stand and bus station).

(ii) Immediately after the property was purchased, the assessee received a notice of acquisition under s. 269D of IT Act on 18th July, 1974. These proceedings continued till about 1995.

(iii) On 17th Feb., 1976, Urban Land (Ceiling and Regulation) Act, 1976 came into force in the State of Maharashtra according to which the entire land held by the assessee was surplus and no portion was buildable. As a matter of fact, by the order dt. 28th March, 1978, made by Competent Authority, Pune Urban Agglomeration, Pune under s. 8(4) of the Urban Land (Ceiling and Regulation) Act, 1976, the entire land was declared surplus vacant land.

(iv) There were various tenants and sub-tenants who were in possession of considerable part of the property in question.

The learned counsel argued that on account of these severely adverse developments, the assessee-firm, was rendered helpless and its business purpose of developing the property and resale of flats was completely aborted even before it could commence. As a result the firm did not carry out any activity. The balance sheet of the firm showed that there was no expenditure at all on the land in question towards development of the property.

24. The learned counsel further argued that while the assessee-firm was thus beset by severe constraints, serious disputes cropped up amongst the partners which made it impossible for the firm to carry out any activities. These disputes were a matter of record and stood established beyond any doubt. In support of these contentions the learned counsel took us through various documents from pp. 200 to 228 of Vol. I of the paper book filed by the assessee. These documents related to period from 9th Dec., 1976 to 12th Aug., 1989, and showed that considerable amount of bickering between Shri N.M. Gidwani on the one hand, and other partners, on the other hand, had started soon after filing of statement under s. 6 of the Urban Land (Ceiling & Regulation) Act, 1976. By the letter dt. 9th Dec. 1976, Shri N. M. Gidwani was asked to represent his case before competent authority to the extent of his 20 per cent share only and not to represent other partners in the case. This stand was reiterated in another letter dt. 11th Feb., 1977, addressed to Shri N.M. Gidwani. There was also considerable exchange of correspondence between the advocates on the two sides. Shri N.M. Gidwani filed during April, 1979, a suit against the other partners in the Court of the Civil Judge, Senior Division, Pune being regular Civil Suit No. 653 of 1979. Thereafter, a letter was addressed to Shri N.M. Gidwani by other partners on 15th April, 1979, which, inter alia contained the following paragraph:

"The property has been acquired under the Urban Land Ceiling and Act 1976, cannot be developed now and looking to your fraudulent activities and non-co-operative attitude we have decided, we shall not carry out any commercial activities of our firm Shanti Builders, in which you are partner with immediate effect as we cannot continue to work together".

25. According to the learned counsel of assessee this letter did for all particular purposes bring the business of the assessee-firm to an end. There was a clear statement and declaration of intention of not carrying out any commercial activities of the assessee-firm. The matter was also carried out in the High Court of Bombay by way of Criminal Writ Petition No. 310 of 1982. The process of allegation and counter-allegations between the partners continued as late as July/August, 1989, as to be seen from the letter of Shri S.H. Gursahani, advocate on behalf of other partners to Shri A.V. Lokhande, advocate for Shri N.M. Gidwani dt. 17th July, 1989, and reply of Shri A.V. Lokhande, advocate to Shri Shyam H. Gursahani, dt. 12th Aug., 1989. The learned counsel argued that in such a situation there was no question of any business having continued by the partners. Though the partnership was not dissolved in technical terms, for all practical purposes, the business relationship amongst the partners ceased to exist. So much so that after culmination of Urban Land Ceiling proceedings, the different groups of partners of the firm entered into separate negotiations with the purchaser of the property for the sale of their respective share in the property.

26. The learned counsel for the assessee further argued that as the business relationship had come to an end long back, it could not by any stretch of imagination be said that the immovable property in question was a trading asset as on the dates of sale agreements during 1996. As a matter of fact the immovable property in question was never a trading asset, though it was acquired with the intention of being exploited for the purpose of carrying out a business of resale of flats. The land in itself never constituted stock-in-trade of the assessee though it was intended to yield trading assets of the assessee at a future date. However, for the reasons and circumstances beyond the control of the partners such eventuality never came into being and the land continued to remain merely a capital asset in the hands of the firm. Even if for arguments sake, without conceding, it was assumed that the land acquired some business attributes initially, the business purpose got completely aborted and sterilized due to the course of events. The assessee could never commence business in real estate as was intended initially and finally what happened was merely a case of realization of the asset by way of a single transaction of transfer.

27. The learned counsel for the assessee argued that the impugned order under s. 263 made by the CIT was full of inaccuracies, factual errors and wrong assumption of facts as a consequence of which the inferences drawn and ultimate finding arrived at by the learned CIT were completely vitiated and erroneous. The learned counsel for the assessee argued that the learned CIT arrived at an incorrect understanding of the partnership deed itself. In the impugned order he had at several places relied upon the fact that the assessee was a dealer in land which was completely devoid of any ground reality. While in the preamble of the partnership deed dt. 1st Feb., 1973, "dealers in land" was also mentioned among several things, relevant cl. 6 of the partnership deed, in this respect was quite clear. This cl. 6 is as under:

"The business of the partnership shall be, inter alia, of acquiring vacant land or other immovable properties including plot at Petit Hall, Poona, and of developing such plot as builders, contractors, owners, financiers and dealers in buildings, flats, blocks, garages, offices, shops, sheds, etc., and such other business, or businesses as the parties may from time to time agree upon."

The learned counsel for the assessee argued that cl. 6 nowhere mentioned the business of the partnership to be dealership in land. The word "etc" in cl. 6 was used in the context of the like kind and, therefore, could not include land. There was a specific reference to immovable property in question as "plot at Petit Hall, Poona", and it was clearly mentioned that the business of the partnership was developing the plot in question. The correct inferences to be drawn from cl. 6 were that the business of the partnership was development of plot at Petit Hall, Poona, and not resale of the plot itself for profit. In this manner the learned CIT committed a clear mistake in interpreting the business purpose of the assessee-firm.

Secondly, the learned counsel continued, the learned CIT committed a grave error in holding that the plot in question constituted stock-in-trade of the assessee-firm and was described as such in the accounts of the assessee-firm. The fact of the matter was that the assessee had never shown plot as stock-in-trade. In the balance sheet of the firm for the year ended 31st Dec., 1974 and 31st Dec., 1975, the amount paid by the assessee-firm towards the purchases of plot was shown as "plot account". There was nothing to indicate in P&L a/c or balance sheet for all the years that the firm had ever treated this plot as stock-in-trade. The truth of the matter was that the plot never became stock-in-trade of the assessee-firm from the day one till it was finally sold. Merely because the firm had intended to exploit the plot by way of development could not have resulted into the plot itself becoming stock-in-trade even before any further steps were taken for such exploitation.

Thirdly, the learned counsel continued, the learned CIT committed gross error of fact in arriving at the conclusion that there was initially a bungalow on the plot which was demolished at an expenditure of Rs. 75,000. As a matter of fact the sum of Rs. 75,000 was not an expenditure but an income received by the assessee-firm on demolition. Thus, there was no business expenditure incurred by the assessee-firm. Certain amount was shown in the balance sheet as received from purchasers. The same in fact was in the nature of loan and was subsequently refunded. Thus, no expenditure had been incurred towards construction on the plot. The CIT thus committed gross error of fact in treating the land in question as a trading asset.

Fourthly, the learned CIT committed further error in holding that only 5009 sq. mtrs. of land was surplus without affecting the FSI and, therefore, the assessee could have done the construction activity even during the earlier period and sold the flats or even the land. The fact was that in view of the orders passed by various authorities, the entire land was surplus till the fresh order was made on 18th April, 1996. The entire land had been declared surplus by the order of the competent authority in writing as early as on 28th March, 1978. The assessee's appeal to Collector and appellate authority was also dismissed or 20th Jan., 1979. The application made by the assessee under s. 20 of ULCA and declaration under s. 21(1) of ULCA had also been rejected on 2nd April, 1979, 5th April, 1979 and 30th March, 1979, respectively. Notification under s. 10(3) of ULCA had also been made on 8th April, 1979, notifying the land as having been acquired by Government of Maharashtra from 15th May, 1979. It took assessee 18 years to have this order modified. The assessee-firm was constituted in February, 1973, and the final order was passed in April, 1996.

Fifthly, the learned CIT erred in law in holding the view that every receipt of a partnership-firm could be nothing but business income. Definition of business under s. 2(d) of the Indian Partnership Act, 1932, also included income earned as capital gain. A firm is capable of holding property and on transfer of property liable to assessment for income chargeable to tax under the head "Capital gains". In support of this contention the learned counsel of the assessee placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT vs. J.M. Mehta and Brothers (1995) 128 CTR (Bom) 226 : (1995) 214 ITR 716 (Bom).

28. The learned counsel for the assessee argued that CIT was not correct in observing that the AO did not examine the bank account. The fact of the matter was that there was no bank account at all. As on 1st Jan., 1979, there was a credit balance of Rs. 33.75 in the bank account in Dena Bank which was adjusted by the bank towards service charges and the account was closed.

29. The learned counsel for the assessee further argued that where a particular transaction was not in the ordinary course of business of the assessee, but was an isolated or single instance of a transaction, the onus to prove that the transaction was an adventure in the nature of trade would be on Revenue not on assessee. The mere circumstance that the assessee's explanation that the transaction was an investment not being acceptable would not be sufficient to discharge the burden of the Department. For this the learned counsel placed reliance on the judgment of Hon'ble High Court in the case of Tribuvandas Vallabhadas vs. CIT (1966) 61 ITR 518 (Bom). He also placed reliance on the judgment Saroj Kumar Mazumdar vs. CIT (1959) 37 ITR 242 (SC) and Dalmia Cement Ltd. vs. CIT 1976 CTR (SC) 442 : (1976) 105 ITR 633 (SC).

30. The learned counsel further argued that it was not true state of affairs that an asset acquired as a business asset shall always be construed to be a business asset only. In the instance of a transaction, the onus to prove that the transaction was an adventure in the nature of trade would be on Revenue not on assessee. The mere circumstance that the assessee's explanation that the transaction was an investment not being acceptable would not be sufficient to discharge the burden of the Department. For this the learned counsel placed reliance on the judgment of Hon'ble High Court in the case of Tribuvandas Vallabhadas vs. CIT. He also placed reliance on the judgment reported in Saroj Kumar Mazumdar vs. CIT and Dalmia Cement Ltd. vs. CIT.

31. The learned counsel further argued that it was not true state of affairs that an asset acquired as a business asset shall always be construed to be a business asset only. In the event of sterilization of stock-in-trade subsequent receipts would amount to capital receipts. In support of this contention the learned counsel for the assessee placed reliance on Supreme Court judgment in the case of Universal Radiators vs. CIT (1993) 112 CTR (SC) 61 : (1993) 201 ITR 800 (SC) and CIT vs. Canara Bank Ltd. (1967) 63 ITR 328 (SC). Further, the learned counsel argued that it is the nature of the asset as on the date of transfer that would be crucial and not as on the date of its acquisition. In support of this contention he placed reliance on the judgment of Hon'ble Madras High Court in the case of M. Nachiappan vs. CIT (1998) 144 CTR (Mad) 359 : (1998) 230 ITR 98 (Mad).

32. The learned counsel placed considerable reliance on the judgment of the Hon'ble Mumbai High Court in the case of CIT vs. Anandlal Becharlal & Co. (1977) 107 ITR 677 (Bom) and argued that the assessee's case was covered by the ratio of this judgment. He also placed reliance in this context on judgments Janki Ram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC), G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC); and D.L.F. Housing & Construction (P) Ltd vs. CIT (1982) 29 CTR (Del) 199 : (1983) 141 ITR 806 (Del). He also pointed out that in the show-cause notice issued by the CIT on 10th Jan., 2001, it was stated that he proposed to set aside the assessment with direction to the AO to redo the assessment after taking into account the facts of the case. Once again in para 3, the learned CIT proposed to invoke the provisions of s. 263 to direct the AO to look into the aspects of the case afresh. However, in the impugned order under s. 263 the learned CIT wrongly observed that the notice under s. 263 had mentioned about the directions to the AO to treat the income as business income.

33. Shri Rajkumar, the learned Departmental Representative, argued that as held by Hon'ble Gujarat High Court in the judgment Gujarat State Co-operative Bank Ltd. vs. CIT (2001) 167 CTR (Guj) 34 : (2001) 250 ITR 229 (Guj), a decision is an authority for what it actually decides. This aspect was required to be kept in mind while applying the various judgments referred to by the learned counsel for the assessee. What were essential to be taken into consideration were the facts of the case. In the instant case the firm was constituted to carry on business. The partnership deed referred to development of lands and at the same time it also referred to dealing in lands. In the balance sheet the assessee had shown the immovable property in question as "plot account". The property was not shown as "land". There was a bungalow on this land which was demolished from which the assessee received a sum of Rs. 75,000. This amount was shown in the accounts of the assessee as reducing the cost of plot to the assessee. This treatment given by the assessee had indicated that the land in question was to be used as trading asset.

34. The learned Departmental Representative argued that the facts of the case speak for themselves. The assessee purchased the land in question in 1973 approx. measuring 33,000 sq. mtr. by making an investment of 10 lakhs. This gave the average cost of Rs. 15,000 per sq. mtr. only. When the land was finally sold it fetched the price of about Rs. 37 per sq. mtr. There was price appreciation of about 500 times in 24 years. By no stretch of imagination such astronomical rise in value could have taken place on account of passage of time. Such astronomical price appreciation could happen only if there was a major improvement of title in the intervening period. The assessee purchased the property for a song only because there were considerable hurdles in the development of the property. It was purchased with the intention of removal of the hurdles and that was precisely what happened over the course of years. In these circumstances it could not be said that the assessee was prevented by unforeseen developments. It was an admitted fact that the plot was encumbered by tenants and sub-tenants and it also was under reservation. Inspite of this fact the assessee-firm was started to take a risk. The assessee could not, therefore, say that it was prevented from carrying out its business purpose. Relying upon the judgment of Hon'ble Supreme Court Lakshminarayan Ram Gopal & Son Ltd. vs. The Government of Hyderabad (1954) 25 ITR 449 (SC), the learned Departmental Representative argued that as long as the firm was continued it carried on and existed for the purpose of business.

35. The learned Departmental Representative argued that the assessee filed returns of income for 3 years. After that the assessee stopped filing the returns of income. But at the same time the assessee continued to make representations before various authorities. The assessee also entered into litigation against the orders passed by various authorities. These were the activities of business. It was not that the assessee was sitting idle. The assessee was carrying on the work of perfecting its title of the asset with a view to enhance its business profits.

36. The learned Departmental Representative pointed out that during the course of assessment proceedings the assessee valued the land in question as on 1st April, 1981, at Rs. 4.23 crores. The AO did not accept this valuation. He treated the fair market value of the property as on 1st April, 1981, to be only Rs. 22,50,000. It was because the value of the property increased only after the constrain of ULCA was removed. The assessee fought tooth and nail to remove this constrain. If the assessee had sold the property on 'as is where is' basis, the assessee could claim that there was transfer of capital asset. However, after having taken all the measures to perfect the title and enhance the value, the transaction could not be viewed anything but the sale of trading asset.

37. The learned Departmental Representative argued that nothing turned upon the disputes amongst the partners. It was true that there were disputes but the fact remained that the firm was never dissolved. Assessee himself filed the return of income in the status of the firm and offered the income arising on sale of the land in question as income belonging to the firm. Hence, the dispute amongst the partners could not be considered to be valid reasons to advance the argument that the character of the firm had undergone change.

38. According to the learned Departmental Representative there was no force in the contention of the assessee that after having passed an order under s. 264 the CIT was precluded from passing an order under s. 263. He compared the language of the provisions of s. 264 with that of s. 263 and argued that while there was a bar in the provisions of s. 264, there was no such bar in the provisions of s. 263. In the circumstances, there could be a question about the validity of s. 264 order but the order passed under s. 264 could not have any bearing on the powers of the CIT under s. 263. It was because in the provisions of s. 263 there was absolutely no restriction. According to the contentions of the assessee the CIT was required to satisfy himself before passing an order under s. 264 that the provisions of s. 263 did not apply. Thus, the CIT should become an investigator every time an application under s. 264 was made. That was not the function of CIT while deciding upon the petitions under s. 264 made by the assessee. While deciding the assessee's application, CIT was concerned with the issue as to whether investments made by one of the partners in-his own name could be considered to be made by the firm for deductions under s. 54EA/54EB. CIT decided this question on the footing that there was income chargeable to tax, as determined by the AO, under the head "Capital gains". He, therefore, arrived at the conclusion that if there was capital gains tax there should be exemption also in respect of investments. Thus, he decided only a limited issue. CIT while passing the order under s. 264 did not apply his mind at all to the question as to whether the income should have been assessed as business income or capital gains. It was, therefore, not an issue decided by CIT. Hence, the assessee was not justified in invoking the doctrine of merger. At any rate any doubts in this behalf had been put to rest by Expln. to s. 263(1) after substitution by the Finance Act, 1988. Hon'ble Madras High Court in their judgment reported in Bundy Tubing of India Ltd. vs. CIT (2002) 173 CTR (Mad) 383 : (2002) 253 ITR 286 (Mad) held this Explanation to be clarificatory. In this view of the matter various decisions relied upon by the learned counsel of assessee pertained to old law and were not of any consequence. It was not a case where CIT had initiated proceedings under s. 263 and then dropped. Merely not acting upon the letter of the AO dt. 13th April, 1999, did not amount to that the learned CIT concluded that there was no case for action under s. 263. The learned Departmental Representative referred to the decision in the case of J.P. Goel (HUF) vs. IAC (1992) 41 ITD 390 (Cal) in this respect.

39. The learned Departmental Representative argued that on the facts and in the circumstances of the case the learned CIT was fully justified and had jurisdiction to take recourse to the provisions of s. 263. If the AO acted on wrong assumption of facts and arrived at a conclusion based on such wrong assumption of facts, such an order was liable to be corrected in exercise of the revisionary powers of the CIT under s. 263. The entire thrust of the AO's office note was whether the transaction in question was an adventure in the nature of trade or capital receipt. As a matter of fact this question should not have arisen at all. The judgment of Hon'ble Supreme Court Lakshminarayan Ram Gopal & Sons Ltd. vs. The Govt. of Hyderabad (1954) 25 ITR 449 (SC) clearly ruled out this question. There was no such question and, therefore, the AO was not required to go into such question at all. The property was purchased for the purpose of business. The firm was constituted to deal with this land. Facts of the case were, therefore, very clear. However, once the AO started on wrong assumption of facts he proceeded to make an erroneous order. The wrong assumption on the part of the AO was that the property was in the nature of an investment, or the trading asset which subsequently became a mere investment. In the case of a firm the dominant intention had to be business. This aspect was overlooked by the AO. He also overlooked that in the initial assessment years the assessee had collected deposits from purchasers. The property as purchased was full of difficulties. It took long time to remove the encumbrances. How could the time taken make the trading asset a capital investment? It was the case of a firm doing business. The AO, therefore, embarked upon an enquiry which was not called for. The learned Departmental Representative placed reliance on the judgment reported in CIT vs. McMillan & Co. (1958) 33 ITR 182 (SC) in support of this argument.

40. The learned Departmental Representative further argued that there was no force in the case of the assessee that over the course of time the trading asset became sterile. It was sterile from the very beginning. The assessee with his efforts made the asset fruitful. These efforts were conduct of business by the assessee. If that were not the case the value of the land purchased in 1973 could not have been as low as it was. The learned Departmental Representative argued that on the facts of the case the assessment order made by the AO was erroneous and within the meaning of the parameters laid down by Hon'ble Supreme Court in the case of Malabar Industrial Co. vs. CIT.

41. The learned Departmental Representative argued that there was no force in the contention of the assessee that there was no sale deed executed during the previous year. The assessee himself had offered the income for this year. Having done so the assessee could not rely upon the lack of sale deed. Even otherwise, Hon'ble High Court held in their judgment in Estate Investment Co. Ltd. vs. CIT (1979) 9 CTR (Bom) 272 : (1980) 121 ITR 580 (Bom) that the conveyance was not necessary.

42. Replying to the assessee's allegations that show-cause notice was bad, the learned Departmental Representative argued that no formal show-cause as such was called for under the provisions of s. 263. It only required proper opportunity to be given to the assessee. He relied upon the judgment in Gita Devi Aggarwal vs. CIT & Ors. (1970) 76 ITR 496 (SC) and Renusagar Power Co. Ltd. vs. CIT (1998) 148 CTR (All) 380 : (1998) 234 ITR 782 (All) in this respect.

43. Finally, the learned Departmental Representative submitted that in case certain facts were not considered by the learned CIT while making impugned order under s. 263 the matter could be remanded to CIT for this purpose. He relied upon the judgment reported in (1975) 100 ITR 606 (SC) (sic).

44. In his rejoinder the learned counsel for the assessee argued that in this case purchase agreement was made on 12th Feb., 1973. All the constraints in development of the property experienced by the assessee were subsequent developments. These constraints were mainly proceedings under s. 269D initiated by IT Department, notice by Pune Municipal Transport in March, 1973, and Urban Land Ceiling Act. Actually, Urban Land Ceiling Act, the biggest obstacle, was enacted in 1976, and by no stretch of imagination the assessee could be imputed with knowledge of the same. It was also not correct to say that the assessee-firm removed all the obstacles. Reservation of Pune Municipal Transport and notification issued by Collector, Pune, under s. 126(4) of Maharashtra Regional & Town Planning Act, 1966, acquiring substantial part of the property had continued even on the date of agreements to sale of land in question by various partners of the firm. Thus, fact of the matter was that all the hindrances and encumbrances came subsequently and the same could not be completely removed even as on the date of sale.

44. The learned counsel for the assessee argued that it was fundamental mistake to consider that land in question was a trading asset of the firm. It was only intended to be used for the purpose of business but the business could not even be started. All along the holding of the property by the firm was nothing but a passive holding as a capital asset on account of various acquisition proceedings and acquisition orders. The learned counsel for the assessee referred to development agreement dt. 8th April, 1996, at pp. 111 to 143 and pointed out that memorandum of understanding was signed with M/s Amar Avinash Associates on 1st June, 1995. Even no objection certificates under s. 269 UL(3) by appropriate authority was granted on 11th Nov., 1995. The final order of ULCA was made on 18th April, 1996. Thus, even ULCA exemptions had not been received by the assessee-firm as on the dates of the agreements with the purchaser. Thus, the entire case made out by the CIT as well as the Departmental Representative was based on incorrect assumption of facts. The learned counsel also pointed out that the judgment reported in 24 ITR 449 (sic) relied upon by the Departmental Representative had been rendered in relation to EPT. Similarly, the judgment of Hon'ble Madras High Court Bundy Tubing of India Ltd. vs. CIT was not a case relating to revisionary jurisdiction under s. 264

46. The learned counsel for the assessee argued that it was travesty of facts to state that order under s. 264 in the case of the assessee had no connection with order under s. 263 made by the successor CIT. By the order under s. 264 the earlier CIT granted assessee deductions under ss. 54EA and 54EB. How could this benefit conferred upon the assessee be taken away by another CIT? How could this order be vacated by the successor CIT? It was for this reason that the language of s. 264 excluded any possibility of a subsequent order under s. 263.

47. The learned counsel for the assessee argued that the question whether the assessee should be assessed under the head "Profits and gains of business or profession" or under the head "Capital gains" loomed large right from the very beginning. This was considered at the stage of grant of s. 230A certificates. This was again considered while imposing and thereafter lifting prohibitory orders under s. 281B. This was considered by the AO while making the assessment order in close consultation with the learned CIT. Immediately after making the assessment order, the AO addressed the letter to the CIT on 13th April, 1999, requesting him to ratify the assessment order or else take recourse to provisions of s. 263. The CIT had concurred with the views of the AO on all these occasions. Thereafter, by order under s. 264 the CIT put his legal stamp on the view taken by the AO. Earlier in his letter dt. 19th April, 1999, to the AO in reply to his letter dt. 13th April, 1999, he had clearly communicated to the AO that in view of the fact that there were no developments since 1979, he agreed with the findings of the AO.

48. The learned counsel for the assessee argued that nothing much turned upon some deposits received in the very initial years. These deposits were in fact loans because the assessee had not taken any further steps at all for developing the property. The assessee soon started refunding these loans and by August, 1976, all the advances had been refunded.

49. The learned counsel for the assessee also argued that it was not correct to say that escalation in the price of the property was entirely attributable to removal of hurdles. There could be any number of factors for increase in the price of property and the contentions of the learned Departmental Representative in this respect were merely guess work not supported by any objective data or analysis of surrounding facts.

50. We have carefully perused the impugned order under s. 263 and other material on record and considered the rival submissions. In our considered opinion the impugned order is not sustainable and liable to be quashed on several counts as elaborately discussed in the subsequent paragraphs.

51. In our view the learned CIT did not have jurisdiction to revise the assessment order in this case for each of the three reasons stated by the learned counsel for the assessee, viz., (a) the assessment order having been made under close supervision of the then CIT; (b) the order having been subject to the earlier order under s. 264 as made by the then CIT on 28th March, 2000, and (c) the assessment order having been made by the AO in a judicial manner after taking into consideration all aspects of the matter. From the detailed facts presented before us by the learned counsel of the assessee as enumerated in para 20 of this order it has emerged with a fair degree of certainty that the AO had been consulting the CIT in this case at various stages and the view taken by the learned AO that income was chargeable to tax under the head "Capital gains" had the approval of the then CIT. This aspect is expressly mentioned by the AO in para 3 of his letter dt. 13th April, 1999, addressed by him to the then CIT in the following words:

"Meanwhile, order under s. 143(3) of the IT Act in the case of M/s Shanti Builders has been completed on 5th April, 1999, raising a demand of Rs. 9,16,64,958. In this order the transaction was accepted as, not an adventure in the nature of trade but of capital gain. The reasons for accepting capital gain income are elaborately discussed in the office note (copy of order enclosed). However, huge demand arose because the valuation of property as on 1st April, 1981, at Rs. 4,23,00,000 was not accepted. It was adopted at Rs. 22.50 lakhs on the basis of reasons given in the assessment order. Similarly, the expenses of Rs. 2,29,95,225 were also not allowed as it was found that it is not in connection with such transfer. The claim of deduction under s. 54EA/54EB of Rs. 18,41,97,000 was also disallowed on the basis of detailed reasons discussed in the assessment order. The case was also discussed with you from time to time and your honour was also of the same opinion."

The learned AO also sought formal ratification of the view taken by him in this behalf from CIT in the following words:

"However in case if your honour feels that decision of undersigned of treating the transaction of capital gain is not correct and it could have been treated as adventure in nature of trade then you may initiate 263 proceeding."

The learned CIT replied to the communication of the AO vide his letter dt. 19th April, 1999, addressed to the AO in the following manner:

No. Pn.T/Stay/	/1999-2000	Office of the CIT-I
		Pune
		Dt. 19.4.1999

To:

The Jt. CIT,

Special Range-3

Pune

Sub: Lifting of prohibitory attachment under s. 281B of the IT Act, 1961

Please refer to your letter No. Pn /JCSR-3/810/99-2000 dt. 13.4.99.

2. After discussion, I am directed to intimate as under:

(a) The arrangements made for disputed demands under s. 143(1)(a) are satisfactory

(b) The CIT agrees with the AO's findings in view of actions since, 1979 of no developments.

(c) The proposal of lifting attachment is approved, as suggested in your letter.

Sd/-.

(R.MTADAS)

ITO (Tech.)

For CIT-1, Pune"

52. In the face of this evidence we are unable to accept the contentions of the learned CIT in the impugned order and his findings in this regard in para 43 of the impugned order. Respectfully following the judgment of Hon'ble Calcutta High Court in the case of CIT vs. Hastings Properties (2001) 171 CTR (Cal) 626 : (2002) 253 ITR 124 (Cal) and the decisions of the Tribunal relied upon by the assessee, mentioned at para 20 of this order, we hold that the assessment order was not open to revision under s. 263 for the reason that the assessment order had been made by the AO after having discussed the case with CIT from time to time and in accordance with the opinion then expressed by the CIT.

53. We are also of the view that in this case the subsequent CIT did not have jurisdiction to exercise powers under s. 263 for altering the head of income after the order of the earlier CIT under s. 264. The learned counsel for the assessee has addressed us at length on the issue of merger of the assessment order of the AO with order under s. 264 of the CIT. The learned Departmental Representative, on the other hand, argued that there was merger only to the limited extent of the issues considered by the CIT in the order under s. 264. He has also placed reliance on the amendment of Expln. to s. 263(1) by the Finance Act, 1988, and the judgment of Hon'ble Madras High Court Bundy Tubing of India Ltd. vs. CIT. (It may be noted here that the said amended Explanation refers only to an order in appeal and does not provide for revisionary order under s. 264). The learned CIT has also relied upon limited merger theory in the impugned order. For the purpose of this appeal we do not consider it necessary to go into the question as to whether an order under s. 264 having been made the assessment order as a whole merges into the revisional order under s. 264 or only in respect of those issues in the assessment order specifically considered in the order under s. 264 because we find that the learned CIT has while making order under s. 264 in March, 2000 both expressly and implicitly endorsed the view of the AO that income was chargeable to tax under the head "Capital gains" and not under the head "profits and gains of business or profession". While considering this aspect in paras 44 to 55 of the impugned order under s. 263 the learned CIT has taken the view that in the order under s. 264 his predecessor was concerned only with the limited issue of the deduction under s. 54EA/54EB. The successors CIT has not attached importance to the fact that vide letter dt. 13th April, 1999, the AO had specifically requested the then CIT that if it was found that the decision of treating the transaction as capital gain was not correct, then the proceedings under s. 263 may be initiated and vide letter dt. 19th April, 1999, the then CIT conveyed his agreement with the findings of the AO. The order under s. 264 in March, 2000, was made thereafter. At any rate we find that in this order under s. 264 the learned CIT once again referred to the fact that the assessee-firm could not conduct any business of development of the property. This aspect has been discussed in para 3 of the order under s. 264 in the following words:

"The above firm was formed for development of the property of 4, Sadhu Waswani Path, Pune. Due to disputes, no business was carried out. Ultimately, the land was subject to provisions of Urban Ceiling Act, 1976. Later on land was sold for 49 crores. The amount was received by 3 groups, separately by 3 separate sale deeds. The Gidwani group received 21 crores and balance of Rs. 28 crores were received by other two groups. Gidwani group did not agree for sale earlier. Later on, the purchaser gave higher price and occupied the entire land and as a result the sale of entire property was concluded".

Obviously, the learned CIT satisfied himself first that the income arising to the assessee was not the business income. In the impugned order the learned CIT has interpreted the findings of his predecessor, "this position has now become final. Naturally, the consequences of this action of AO should follow". According to the impugned order the learned CIT was referring to the position having become final in view of the stand taken by the AO. We are unable to accept this argument. How could the CIT, a superior authority, consider himself bound by a position as having become final by way of assessment order of his subordinate? Surely, the learned CIT who made the order under s. 264 too was aware of his powers under s. 263. If he held that the assessment under the head "Capital gains" had become final, it could only be if he found that position to be in accordance with law. We are unable to subscribe the view that in the order under s. 264 the learned CIT merely subjugated himself to the finding as given by the AO in the assessment order. It is also important to note that there could not be any question of deduction under s. 54EA/54EB were the income chargeable to tax under any head of income other than "Capital gains". The learned CIT, was, therefore, required to satisfy himself with the correctness of assessment of income under this head of income which he did by way of recording the findings in para 3 of his order that due to disputes among the partners the business of development of the property was not carried out. There is also force in the contention of the learned counsel of the assesse that while predecessor CIT by his order under s. 264 allowed the assessee benefit under s. 54EA/54EB the direct result of the impugned order under s. 263 by the subsequent CIT is withdrawal of benefit granted by the predecessor. By the impugned order under s. 263 the learned CIT does not merely revise the assessment order; he goes on to revise the order of his predecessor under s. 264 as well.

54. In the case of Kunhayammed & Ors. vs. State of Kerala & Ors., the Hon'ble Supreme Court has observed at p. 382 in the following words:

"Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before a superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law."

55. In the case of Festo Elgi (P). Ltd. vs. CIT, Hon'ble High Court has held that the successor CIT, by exercise of his powers under s. 263, cannot interfere with the order of his predecessor irrespective of his reasons for doing so. "The successor who considered himself abler cannot on that score undo what his predecessor had done".

56. We also see considerable force in the contention of the assessee that the AO having considered all the facts and circumstances of the case in a judicial manner and having arrived at his conclusion in the proper manner cannot be said to have made an erroneous order only because the CIT subsequently takes a different view of the matter. This position in law has been succinctly stated in the judgment of Hon'ble Mumbai High Court in the case of CIT vs. Gabriel India Ltd. at p. 115 in the following manner:

"It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the CIT with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent."

57. Hon'ble Supreme Court has also upheld this position of law in its judgment in the case of Malabar Industrial Co. Ltd. vs. CIT at p. 88 in the following words:

"The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law."

Applying this legal position to the order passed by the AO, we find that he has taken into consideration all the material facts of the case. The learned CIT has at various places in the impugned order under s. 263 alleged that the AO had not taken into consideration certain important facts of the case. However, we find that what the learned CIT alleges to be facts of the case not taken into consideration by AO are his inferences from the facts of the case and not the facts of the case themselves. The learned CIT has not brought out in his lengthy order any specific facts of the case omitted to be noticed by the AO. In other words, the case of the learned CIT in the impugned order at best is that the AO should have drawn different inferences from the facts of the case than he did. We have reproduced in para 8 of this order the detailed "Office, note" recorded by AO along with the assessment order made by him under s. 143(3). 'In this office note the learned AO has enumerated his reasons for accepting the contention of the assessee-firm that the agreements to sale with M/s Amar Avinash Associates resulted into transfer of a capital asset. Broadly speaking, the learned AO has based his conclusion on the grounds that (a) for last 24 years the firm could not carry any business activity due to various Government reservations and restrictions; (b) the business relationship among the partners was brought to an end on account of disputes amongst the partners especially by way of letter dt. 15th April, 1979, and (c) no activity whatsoever had been carried out to develop the plot in question. On consideration of this office note we do not find that the learned AO acted on inadequate or insufficient grounds or that the view taken by him is such that he was not supposed to take or no reasonable person could have taken. In these circumstances, we find that the learned CIT has in the impugned order termed the order passed by the AO as erroneous simply because he did not feel satisfied with the conclusions as drawn by the AO.

58. In short we hold that the learned CIT did not have jurisdiction under s. 263 to revise the assessment order in question for the following reasons:

(i) The assessment order was made by the AO under close supervision of the then CIT.

(ii) The assessment order made by the AO had already merged in respect of the very same issues, in the order of earlier CIT under s. 264.

(iii) The assessment order as made by the AO cannot, in the eyes of law, be held erroneous.

59. Thus, we hold that in the instant case the learned CIT did not have jurisdiction to invoke the provisions of s. 263 of the Act. However, during the course of hearing before us considerable arguments were made from both the sides in respect of the merits of the case. According to the learned counsel for the assessee the AO had taken a correct view of the matter and the reasons given by the learned CIT for taking a different view were not tenable. We, therefore, proceed to record our views on the merits of the case as well. At the outset, we are not impressed by the arguments of the learned CIT in the impugned order as well as of the learned Departmental Representative during the course of hearing before us that the assessee being a firm the income was required to be brought to tax under the head "Profits and gains of business or profession" and not under the head "Capital gains". The thrust of the arguments in this respect is that the firm is essentially constituted to carry on business and, therefore, any assets acquired by the firm cannot be anything but business assets. This argument overlooks the basic fact that business asset held by a firm can be in the form of a capital asset as well. For example, if a firm acquires plant and machinery for the purpose of its manufacturing activity such plant and machinery would be capital asset in the hands of the firm and any subsequent sale of such plant and machinery by the firm would only amount to transfer of a capital asset. The fallacy in the arguments of Revenue in this respect lies in the fact that it is assumed that a business asset has to be a trading asset only which is not the correct position under the well-established principles of accountancy. A business asset whether in the hands of the firm or an individual or a company or any other entity carrying on business can comprise of capital assets as well as trading assets. Where the transfer is of a capital asset it would give rise to income chargeable to tax under the head "Capital gains" and where the transfer is of a trading asset such receipts are to be considered under the head "Profits and gains of business or profession." What is, therefore, required to be determined in the instant case is not as to whether the land in question was a business asset of the firm but whether it was a capital asset or a trading asset in the hands of the firm. As to this basic position it does not make any difference at all whether it is the case of a firm or any other assessee. The judgments relied upon by the learned CIT in this respect do not affect this elementary position. The judgment of Hon'ble Supreme Court in the case of A.L.A. Firm vs. CIT is related to the assets that were admittedly stock-in-trade of that firm. There is no authority and it is humbly submitted there could not be an authority for the proposition that every asset acquired by a firm has to be stock-in-trade by virtue of having been acquired by a firm. The same is the position in respect of the judgment of Hon'ble Supreme Court in the case of Lakshminarayan Ram Gopal & Sons (P) Ltd. vs. The Government of Hyderabad on which so much reliance was placed by the learned Departmental Representative during the course of his arguments. In that judgment legal principle laid down is only that when a partnership firm comes into existence, unlike a company, it an be predicated of it that it carries on a business. That judgment does not deal with the nature of the business assets.

60. In the impugned order under s. 263 the learned CIT has objected to what he considered to be the illegality exhibited by the partners of the assessee-firm in disposing of what they called their respective shares in the property by way of separate agreements to sale with M/s Ajar Avinash Associates. He has also found fault with the AO not having considered this aspect of the case. We are unable to understand as to how this aspect affects the consideration of the issue at hand. It is a matter of record that there were acute differences amongst various groups of the partners of the firm and that they separately negotiated and entered into separate agreements to sale what they called their respective shares in the property. This, according to the learned CIT, partners were not entitled to, as during the subsistence of the firm or until the firm was dissolved no partner could claim any part of the firm's property as his individual property. Be that as it may, the fact remains that the return of income was filed in the status of the firm and the firm offered to be taxed on income chargeable to tax in its hands on the aggregate value of consideration specified in the three agreements separately entered into by the three groups of partners. We are unable to understand as to how the legal infirmity, if at all there was any, in this respect would make the transaction not chargeable to tax as capital gains but at the same time chargeable to tax as business income in the hands of the firm.

61. We also do not see that there is any support to the case made out by the learned CIT in the impugned order under s. 263 from the partnership deed. The learned counsel for the assessee has rightly pointed out that the expression "dealers in land" finds place only in the preamble along with several other things whereas in the operative cl. 6 of the partnership deed the same has not been included. Be that as it may, there is specific mention of the land in question in cl. 6 as "plot at Petit Hall, Poona" and it has been clearly stated that the business of the partnership shall be "developing such plot". As against this there is no material on record to support the assumption of the CIT that the assessee had also intended to deal with this land as it was its stock-in-trade. The reliance placed by the learned CIT on statement of accounts of the firm for the initial assessment years is factually incorrect. The property was not described as stock-in-trade but shown in the balance sheet(s) as an asset belonging to the firm. The assessee has nowhere shown the cost incurred by it for acquiring the plot as its trading cost. We also find that in the applications made by the assessee under s. 20 of ULCA in August, 1976, the assessee submitted that the land was purchased for "the specific purpose of construction of a housing colony for the middle-class families as also for housing a charitable hospital" and that the "partnership was formed only for the purpose of constructing ownership flats and disposing them off and for no other purpose". In our considered opinion, in the absence of any material to the contrary, the only just and fair conclusion would be that the land was acquired by the assessee for the purpose of carrying on business of construction of ownership flats thereon and to make profit on sale of such ownership flats. As a matter of fact this factual position the learned CIT also accept, as would be seen from his observations in para 85 of the impugned order. In this paragraph the learned CIT has, inter alia, observed as under:

"The subject-matter of realization is in respect of vast area of land which the assessee had intended to use for the purpose of construction of flats, hospital and even a college. The assessee had not purchased the land for enjoyment or for personal use but with an intention to conduct business thereon as per the partnership deed and its contents. The extent of the land and the intention in acquiring it are sufficient to label the land as a trading asset and not as a capital asset".

62. In our view as far as the extent of land is concerned the same would not be decisive of the question as to whether it was a trading asset or a capital asset. As to the intention, in our considered opinion, distinction has to be drawn between an intention to conduct business of land and an intention to conduct business of construction on land. As long as the land itself was not contemplated to be traded in, the land could not be treated as a trading asset atleast until such time and only to the extent of saleable units were constructed on the land.

63. During the course of hearing before us the learned counsel for the assessee argued that even if, without conceding, the land has to be treated as having become a trading asset of the firm on account of having been purchased with an intention to conduct business of construction thereon, over the course of time the asset should be deemed to have lost its trading character. According to him it is the nature of the asset as on the date of transfer that is required to be seen and not as on the date of its acquisition. In support of these contentions he has placed reliance on the judgments in the case of Universal Radiators vs. CIT (1993) 112 CTR (SC) 61 : (1993) 201 ITR 800 (SC), CIT vs. Canara Bank Ltd. (1967) 63 ITR 328 (SC) and M. Nachiappan vs. CIT. He has also enumerated at length various developments which took place after the purchase of the property which thwarted the assessee from carrying out the purpose for which property was purchased. The learned CIT has in the impugned order and the learned Departmental Representative in his detailed submissions before us have contented, on the other hand, that these subsequent developments 'did not deter or daunt the assessee from continuing its business purpose as would be seen from the eagerness with which the partners faced the litigations and the constraints brought about by the ULCA and the PMT reservations, etc. The learned Departmental Representative went to the extent of arguing that the difficulties faced by the assessee were no new developments and the assessee-firm was constituted with a view to battle all the constraints and reap a rich harvest on being successful. On consideration of the matter we do not see much force in these contentions of Revenue. At the outset these are in the nature of conjectures and surmises on the part of Revenue. Secondly, there is a patent mistake in this argument inasmuch as the acquisition under Urban Land Ceiling Act could not have been in the contemplation of the assessee at the time of purchase of the property in 1973. According to the assessee it was not aware of PMT reservation which it came to know only subsequent to purchase and further the assessee had not anticipated acquisition proceedings from IT Department under the provisions of Chapter XX-A of IT Act, 1961. Thirdly, as the learned counsel for the assessee argued there was nothing to show that the enormous price was attributable to removal of these difficulties. For example, it could be owing to growth in the importance of location as well. Fourthly, the learned counsel's argument that even at the time of the assessee's agreements to sale both the constraints of ULCA acquisition and PMT reservation had not been solved is factually correct. Finally, it is a matter of record that serious differences and disputes among the partners arose as early as 1976, and such disputes continued till the end. In our opinion the learned AO has rightly held that the letter dt. 15th April, 1979, addressed to Mr. Gidwani brought the business relationship amongst the partners to a virtual halt. The partners of the assessee-firm cannot be seen to have acted in concert to implement a premeditated business strategy of waiting for the disposal of land for about two decades with a view to harvest a bumper crop. As to the so-called 'eagerness' with which the partners contested ULCA acquisition or PMT reservation that does not distinguish the character of the land from capital asset to business asset. An owner is expected to defend both its trading assets as well as capital assets with equal zeal. In short, we are unable to accept the view that the assessee-firm continued to remain the trader of the land in question all along. The gravity and the enormity of the developments that took place soon after the assessee-firm purchased the property cannot be lightly taken. In this case the Competent Authority for Pune had made the order under s. 8(4) of the ULCA on 28th March, 1978. Final order was also passed on 8th April, 1979, acquiring the plot of land w.e.f., 15th May, 1979. This order was set aside by Hon'ble Bombay High Court only in October, 1988. For all practical purposes the firm was disabled to exercise its business purpose of construction or to deal with the land till the order of acquisition was set aside by the Hon'ble High Court. The firm cannot be treated have remained in business while its only asset stood acquired by the Government of Maharashtra. The favourable order of Competent Authority, Pune was made only on 18th April, 1996. It took the firm about 18 years to sort out of the acquisition under Urban Land Ceiling Act. In the meantime the relations between various partners got severely strained that involved both civil and criminal suits amongst them. In our considered opinion the learned CIT has erred in not attaching due importance to these facts of the case.

64. We, therefore, hold that even on merits the learned CIT has not been able to demonstrate that the view taken by him was more justified than the view taken by the AO while passing the assessment order under s. 143(3). On the contrary, the facts and circumstances as on record amply justify the assessment order.

65. In the result we hold that this appeal filed by the assessee should succeed. We, therefore, cancel the impugned order under s. 263 and allow this appeal filed by the assessee.

 

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