2010-VIL-427-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

ITA No.3980/MUM/2009

Date: 13.10.2010

D.C.I.T.

Vs

M/s . RAJESH BUILDERS

Appellant by : Shri R N Jha/DR
Respondent by : Shri Vinod Kumar Bindal/Mr S C Gupta

BENCH

SHRI. R.V. EASWAR (PRESIDENT) AND SHRI. R.K. PANDA (A.M.)

JUDGMENT

PER R.K. PANDA:

This appeal filed by the Revenue is directed against the order dated 09.03.2009 of the CIT(A)-XXII, Mumbai relating to assessment year 2005- 2006.

2. In Grounds of appeal No.1 and 2, the Revenue has challenged the order of the CIT(A) in restricting the disallowance to 50% of Rs. .41,28,262/- made by the Assessing Officer on account of bogus purchase.

3. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of construction of shops and flats as a developer. The Assessing Officer during the course of assessment proceedings noted that the assessee has shown purchase of construction materials. On being questioned by the Assessing Officer to produce the bills and vouchers for his verification, the assessee produced project wise expenditure statement. The Assessing Officer noted that the assessee has shown lot of expenditure on account of purchase of various items. Whatever bills and vouchers produced were verified by the Assessing Officer with the project wise expenditure statement. It was explained to the assessee that in case of missing bills, if the same were not submitted, the same will not be considered as expenditure. The Assessee and his C.A. agreed before the Assessing Officer that no further bills are available for verification. The Assessing Officer thereafter determined such bogus purchases at Rs. .41,28,262/- and added the same to the total income of the assessee.

4. Before the CIT(A), it was submitted that the bills and vouchers for a sum of Rs. .41,28,262/- could not be produced before the Assessing Officer since these were misplaced. However, complete details were furnished before the Assessing Officer by explaining the necessity of the said expenses. It was further submitted that the materials were received at different sites and the records are also kept there for future reference and verifications. It was submitted that during movement of record to office for payment and thereafter its return to the site for future reference, sometimes it results into misplacement of files or bills. It was submitted that all payments were made by account payee cheques. The details of such expenses were submitted by giving particulars of the suppliers. It was further submitted that in case of construction material sometimes bills are not available as the suppliers are small suppliers and do not maintain any proper bills. It was also submitted before the CIT(A), that without purchase of the material the assessee could not have completed the construction work.

5. Based on the arguments advanced by the assessee and after obtaining the remand report from the Assessing Officer, the CIT(A) restricted such disallowance to 50% of the expenses by holding as under:

“The Assessing Officer in his remand report has mentioned that opportunity to cross verify may be provided before genuineness of claim given to the appellant. During the course of appellate proceedings, I find that the appellant has not produced anything before me to verify the claim or to establish it is genuine. However, it is also to be considered that the business of the appellant would require expenses also. Profits cannot be earned without expenditure and keeping the principle of natural justice in mind and holding that certain benefit of expenses need to be given to the appellant the Assessing Officer is directed to restrict the disallowance to 50% of the said expenses on the total amount of Rs. .41,28,262/- and allow the rest as deduction.”

Aggrieved with such order of the CIT(A), the assessee is in appeal before us.

6. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. There is no dispute to the fact that the assessee during the course of assessment proceedings failed to produce the details of purchases of construction materials to the extent of Rs. .41,28,262,/-. Still, we find, the Assessing Officer in his remand report has mentioned that opportunity to cross verify may be provided to the assessee before accepting the genuineness of the claim. We find, the CIT(A) has given a finding that no further details were produced before him to establish the genuineness of such purchases which is quantified by the Assessing Officer at Rs. .41,28,282/- still we find the CIT(A) restricted such disallowance to 50% of the addition on the ground that profit cannot be earned without incurring the expenditure. We do not find any sound reasoning given by the CIT(A). It is the settled proposition of law that for claiming any expenditure as genuine, the onus is always on the assessee to produce evidence to the satisfaction of the Assessing Officer that the expenditure is wholly and exclusive for the purposes of the business. In the instant case, we find, the assessee has failed to discharge the onus cast on it. Merely because the payments are made by account payee cheque, the same, in our opinion, cannot be accepted as genuine business expenditure in absence of supporting details to substantiate the genuineness of such expenditure. In the instant case, although it was stated by the Assessing Officer that cross verification may be provided before allowing the claim as genuine, we find the CIT(A) has not directed the assessee for such cross verification. We find the assessee has already expressed its inability to produce the missing bills/vouchers on the ground that the same are misplaced/not available. Under these circumstances, remanding the matter back to the file of the Assessing Officer also will not serve any purpose. Considering the totality of the facts of the case and considering the fact that relief of 50% granted by the CIT(A) appears on the higher size, restriction of disallowance to 75% as against 50% by the CIT(A), in our opinion, will be justified. The ground raised by the Revenue is accordingly partly allowed.

7. In ground of appeal No.3 to 6 the Revenue has challenged the order of the CIT(A) in directing the Assessing Officer to tax the surplus of Rs. .3,19,97,000/- arising on the transfer of the plot to Satyam Builders as “capital gain” as against “business income” held by the Assessing Officer. In the grounds of appeal No.8 to 10, similar grounds have been taken by the Revenue on account of transfer of land to Brahma Builders in which the CIT(A) held the surplus of Rs. .3,07,81,300/- as “capital gains” as against business income held by the Assessing Officer. In grounds of appeal No.7, the revenue has challenged the order of the CIT(A) in directing the Assessing Officer to treat the surplus arising out of sale of development rights to Satyam Builders and as “Long Term Capital Gain” in the year in which the agreement is fully executed. In grounds of appeal No.11, the revenue has challenged the order of the CIT(A) in directing the Assessing Officer to treat the surplus arising on transfer of land to Brahama Builders as Long Term Capital Gains in the year relevant to the previous year when the last instalment other than the amount to be received at the time of execution of conveyance deed is received by the assessee.

8. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of construction of shops and flats as a developer. During the year under consideration, the assessee has declared the gross turnover of Rs. .1,89,59,472/- which includes profit on sale of land. From the computation of income, the Assessing Officer noted that the assessee has reduced the profit on sale of Shinde land of Rs. .6,96,75,831/- from the “income from business” and considered the same as income from capital gain. Assessee has shown profits on sale of land at Rs. .6,96,75,831/-. Against this profit the assessee has invested in NABARD capital gain scheme and claimed exemption u/s.54C. This resulted in net capital gain at Nil.

9. On being questioned by the Assessing Officer, the assessee vide letter dated 06.09.2007 stated that the firm in principle agrees that the sale of Land is to be considered as business income. Except the issues raised in Assessment Year 2004-05 and matter is pending in ITAT Mumbai.

10. The Assessing Officer noted that the assessee entered into an agreement with Satyam builders for sale of land at Pimpri 5 acres and 22 guntas out of S.No.109/110. The agreement registered with stamp duty on 18.08.2004 states that full value is Rs. .4,60,00,000/- out of which assessee received Rs. 3,43,25,000/- during the Assessment Year. This is also a development agreement and is taxed for Assessment Year 2005-06.

10.1 From the agreement of sale registered on 09.02.2005, the Assessing Officer noted that the assessee has sold the property bearing S.No.13 Hissa No.1, about 17000 sq.meters situated at Village Kondwa, Khwd Taluka, Haveli Dist. Pune and granted and assigned the development right in favour of developers being M/s. Brahma Builders for a consideration of Rs. 3,31,04,300/- and received advance of Rs. .1,10,34,550/-.”

10.2 During the year the assessee had returned certain land purchased from Waghire. As per court order of Civil Judge, Pune dated 04.08.2004 the assessee has returned certain land to Waghire.

Total returned price	Rs. .70,00,000/-
Total cost as per assessee	Rs. .20,98,380/-
The taxable amount works out to	Rs. .49,03,620/-

11. The Assessing Officer referred to the decision of Hon’ble Bombay High Court in the case of Chaturbhai Dwarkadas Kapadia vs. CIT where it is held as under:

“if the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of contract would be relevant to decide the year of chargeability.”

11.1 He noted that in the instant case the dates of agreements are 18.08.2004, 9.2.2005 and 04.08.2004. Therefore, the chargeability of tax is in Assessment Year 2005-06. Since the assessee follows mercantile system of accounting and since the agreement was for Rs. 4,60,00,000/- and Rs. 3,31,04,300/- and Rs. 70,00,000/- the sales consideration should have been taken at Rs. 4,60,00,000/- and Rs. 3,31,04,300/- and Rs. 70,00,000/- respectively instead of offering only amounts received.

11.2 The Assessing Officer further noted that the assessee, as per the audit report, is carrying on the activity of construction and development of building. The assessee being a developer, the land acquired by it is not a capital asset but a business asset. Therefore, the profits on such amount would be liable to tax as business income instead to capital gain as stated by the assessee in the return. He, however, noted that the assessee vide letter dated 06.09.2007 has withdrawn the claim as capital gain and agreed that the amount received is business income but the year of taxability has been disputed.

11.3. Since the assessee is a builder and developer, the Assessing Officer examined the purchase agreements in detail, relied on a couple of decisions and was of the opinion that the transaction of sale of land by the assessee, which is same as in case of sale of flats and shops, has to be assessed as “business income for the following reasons:”

i. The customer agree to buy Land, he pays token money.

ii. After receiving the token money the agreement for sale is executed.

iii. The said agreement for sale is then registered, which states the terms & conditions and sale consideration.

iv. The said sale consideration is agreed to be paid in instalment over the period of 2 to 4 years.

v. Such instalment received is shown as advance against sale of Land.

vi. On receipt of full sale consideration absolute possession of Land will be given to the customer.

vii. The advance received will be transferred to sale.

The assessee has registered and paid stamp duty on all documents. The agreement clearly state that the buyer being developer has got possession of property. Moreover, the assessee is following mercantile system of accounting. The amount receivable on account of any deed registered in current year becomes taxable on accrual basis. The flat sale is to be taxed on percentage completed basis but land deal cannot be taken on percentage basis. Therefore the entire sales receipts is to be offered as revenue during the year under consideration. U/s.271(1)(c) is initiated for furnishing inaccurate particulars of income.”

11.4 The Assessing Officer deferred from the contention of the assessee because the audit report of the assessee firm has stated that the assessee was carrying on the activity of construction and developments of buildings. According to the Assessing Officer the land in question was in the nature of stock-in-trade and not current asset. Since the assessee was a developer, the land acquired by it in his opinion could not be capital asset but has to be treated as business asset or stock-in-trade. Therefore, profit on sale of this land would amount to “business income” as against “capital gain” claimed by the assessee. The Assessing Officer also relied upon the letter that has been submitted by the counsel of the assessee in which the counsel of the assessee has agreed in principle that the sale of land may be considered as business income, since the Department has considered the same as business income in Assessment Year 2004-05. The Assessing Officer on examination of the purchase agreement for the land was of the opinion that the intention of the assessee firm was exploitation of land for business and therefore, profit on account of sale of said land has to be treated as business income. He accordingly taxed the profit on account of sale of land to Satyam Builders and Brahma Builders as business income of the assessee for the Assessment Year 2005-06.

12. Before the CIT(A),it was submitted that the assessee partnership firm is engaged in construction and sale of shops and flats. During the relevant period the assessee had three ongoing projects namely Pimpri Project, Manish Plaza-Kondwa and Kothrud projects. The assessee recognizes revenue as soon as possession of the flats/ shops is handed over. The work in progress includes completed flats/shops unsold as well as under construction. During the relevant year the assessee firm transferred development rights in respect of two plots of land to Satyam Builders and Brahma Builders. Surplus on these two transactions was not at all shown as income by assessee in its books of account as well as in the Profit & Loss Account for the impugned year. During the course of assessment proceedings, M.R. Sharma, a practicing chartered accountant and the authorized representative of the assessee before him, submitted a letter dated 06.09.2007 stating “The firm in principle agrees that the sale of Land is to be considered as business income except the issues raised in Assessment Year 2004-05 and matter is pending in ITAT, Mumbai.” The said accountant further explained the method of accounting etc and claimed that tax would be paid when the entire sale proceeds in respect of these lands is received. The Assessing Officer has placed great reliance on this letter beside others in arriving at his conclusion that the profit on sale of land was taxable as business income.

12.1 It was submitted that the facts of the case have not been properly appreciated by the Assessing Officer. It was submitted that the assessee and 8 other persons entered into a tripartite agreement with M/s. Satyam Builders on 18-08-2004. This agreement was regarding a plot of agricultural land within the Registration Sub Division of Haveli Dist., Pune, and within the limits of Pimpri Chinchwar Municipal Corporation at Pimpri Waghere bearing Survey Nos.109/4B, 109/9, 109/4A, 110/5 and 110/4B. It was submitted that the said agricultural plot of land besides having several restrictive covenants, was also not declared as non-agricultural by the local authorities and therefore could not be developed at all in any manner as on the date of purchase by the assessee, an important aspect totally ignored by the authorities below while holding that the same was purchased for construction. It was submitted that no prudent businessman acquires as a rotating stock which right at the day one cannot be used for the purposes of business. Giving the chronology of events, it was submitted that the assessee acquired a future contingent right to develop the property if it was released by appropriate State authority for having for weaker sections. On the date of this agreement, there was nothing available for transfer to the assessee as the area of the said plot of land within the permissible ceiling limits was retained by the owner and the surplus land was required to be surrendered to the Government. Thus, the assessee acquired future possible rights only in the said plot of land. Referring to a number of decisions it was submitted that it was investment in future rights in a plot of land and not a trading activity.

12.2 Referring to the various agreements by which the assessee sold plot to M/s. Satyam Builders and various other documents, it was submitted that though the same has been termed as a “Development Agreement” but none of the clauses therein refer to any joint development or sharing of the development activities. It was submitted that the purpose of purchasing and selling he said plot of land by way of Development Agreement was because the buyers were escaping liability of stamp duty in the guise of Development Agreement and thereby reducing the cost of purchase besides avoiding the rigours of the prevalent Urban Land Ceiling Act. It was submitted that at the time of purchase of the land, the same could not be developed as it was under Urban Land Ceiling Act with several other restrictive covenants and was not developable at all, a fact which is duly recorded in the Development Agreement as well as clearances. Therefore, the said plot of land was a capital asset only and was never acquired by the assessee for development by itself as a part of its business venture.

12.3 It was submitted that for a non-corporate entity like a partnership firm, no format of the balance sheet has been prescribed by any statute for distinguishing between an investment or a stock in trade. Therefore, nothing more should be read into the manner of presentation of the asset in the balance-sheet. It was submitted that the assessee declared in its balance sheet since inception the plots of land which were developed by raising constructions thereon separately as stock in trade but the plots, which were not intended to be built as a part of the construction or development activities independently, were not shown separately forming part of the stock in trade. It was argued that the addition was made by the Assessing Officer on the basis of a Development Agreement which was registered in the Office of the local Sub-Registrar on 18-08-2004, although factually the Agreement was made on 26-07-2003, when a payment of Rs. 15 lakhs was made by the buyer to the assessee which is mentioned in the said Agreement as on 31-03-2004. Therefore, the date of this transaction has to be taken as 26-07-2003 and not 18-08-2004 on which date the said agreement was registered. Therefore, the transaction did not fall within this year and therefore could not at all be taken cognizance of on this account itself if the contention of the Assessing Officer as regards the date of sale is accepted. Various case laws were also cited before the CIT(A) and it was submitted that for a proper appreciation of law, the provisions of sec. 53A of the Transfer of Property Act, 1882, have to be understood to decide this case. Referring to a number of decisions, it was submitted that the assessee being a builder and developer can buy a property for the purposes of business as well as for long-term investment.

12.4 It was further submitted 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. It was submitted that it is the nature of the asset as on the date of transfer that is required to be seen and not on the date of its acquisition. The various developments which took place after the purchase of the property which thwarted the assessee from carrying out the purpose for which the property was purchased were also brought to the notice of the CIT(A). Referring to a number of decisions, it was submitted that even if the said plot of land was acquired as a business asset in the beginning yet it got converted into a capital asset as it got sterilised. When the asset was sterilised, it got converted into a capital asset and therefore, only capital gains tax could be chargeable. Similar arguments were advanced on account of sale of plot to M/s. Brahma Builders. It was further submitted that looking from any angle only capital gains tax is chargeable if at all and further the same is not assessable in this year. It was submitted that the sale consideration was not received at one time but was receivable over a period of time.

12.5 Regarding the income assessed in the preceding assessment year as profits and gains of business, which was confirmed by the CIT(A), it was submitted that in that year the Revenue officials never looked into and considered the facts and character of the plot of land sold and in particular its status as regards non-agriculture, disputes under the Urban Land Ceiling Act and other reasons due to which the said land was neither buildable nor could be otherwise used for any development purposes. It was submitted that the facts of each plot of land are different and an issue decided on the facts in one year cannot be applied in the subsequent year on another plot of land unless all the facts are similar. It was submitted that in the preceding assessment year none of the Revenue authorities brought on record by way of any evidence that the assessee purchased the said plot of land for development as a business venture or had any such intention when the same was purchased or it could be so developed. It was accordingly submitted that the findings for the preceding assessment year cannot be followed in this assessment year.

13. In appeal, the learned CIT(A) held that the profit of transfer of said land has to be treated as capital gain. While doing so he noted that the Assessing Officer has not questioned the affidavit of Mr. Sharma, where Sharma has stated that the assessee never agreed that the income be taxed as business income. She noted that the assessee has never withdrawn his claim that income was taxable under capital gain. She noted that the counsel of the assessee had in principle agreed to the contention of the Assessing Officer that it was a business income. The Department had considered the same as business income for Assessment Year 2004-05 however, it was clearly stated by the counsel that the issue was pending before the ITAT, Mumbai. According to the CIT(A), it is a well-known rule of law that instead of simply relying on the declaration made by the assessee or his Authorised Representative, it is the duty of the Assessing Officer to analyse the same and give his findings accordingly. This is because the assessee has an option to retract from the statement he has given. Basing a case on such a letter or statement would render the case weak and liable to be rejected if the statement is retracted.

Merits of the case need to be examined. She noted that if the assessee states that the counsel has made admission or concession without consulting him he cannot be bound by it. In such a case the Assessing Officer was duty bound to issue a show cause notice to the assessee and then should have sought a confirmation of the said concession before using the same against the assessee. For this proposition he relied on a couple of decisions.

14. Now, deciding the case on merit, she held that for the purpose of income tax each year is a separate year and the findings of one year cannot overshadow the findings of the subsequent year. The facts and circumstances, in their totality would need to be considered for the year under consideration. She noted that in the relevant year the main question of dispute is the head of income which would arise for taxation of surplus received from the sale of land by the assessee which has to be determined on the basis of fact that whether the plot held by the assessee was stock-in-trade or capital asset. Before proceeding further regarding the head of income under which the income of the assessee is to be charged in respect of sale of land, she was of the opinion that the actual nature and character of land concerned needs to be ascertained.

15. According to her, the decision taken by the CIT(A) in the case of assessee for the Assessment Year 2004-05 cannot be applied in this Assessment Year without looking into the facts which are admittedly different in this year. The principle of res judicata is not applicable to the income-tax proceedings and facts in each Assessment Year need to be examined fresh without being influenced from the decisions in the earlier Assessment Years. According to him, it is apparent from the assessment order that the Assessing Officer decided the case without investigation and without analyzing all the facts of the cases simply on the basis of the assessments done in the previous year and on relying on the letter submitted by the AR of the assessee. His main reasons for holding it to be business income are that (1) the assessee is a builder/developer and therefore his investment in land was for the business purpose (2) the letter of counsel conceding assessment of the said surplus as business profits. According to her, if the later is ignored then the other reason has no legal footing to support. She relied on the decision of the Hon’ble Allahabad High Court in the Deep Chandra & Co 107 ITR 716, according to which the burden lies on the revenue to establish that the profit earned on a transaction was revenue realization and not capital gains. This onus cannot be discharged by surmises and by merely rejecting the explanation of assessee. There is no law or practice that a dealer in a particular commodity cannot hold that very commodity as investment. Referring to CBDT Circular No.4 dated 15.06.2007 he observed that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio to be treated as capital assets and trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income. Referring to the decision of the Bombay High Court in the case of late Shri N.G. Patel, the decision of the Delhi Bench of the Tribunal in the case of Splendour construction (P) ltd. vs.

I.T.O. in ITA No.325 (Delhi) of 2007 she was of the opinion that the concerned land would not fall under the head stock in trade but is liable to be treated as capital asset. He was of the opinion that the income arising from such sale of land has to be taken as capital gains since no business was carried on the land, therefore, was a capital asset in the hands of the assessee. It would qualify as stock in trade only when official approval to trade on it would be granted. According to her, the presumption of the Assessing Officer has been successfully rebutted by the assessee.

16. She observed that the assessee here is a developer and builder of shops, flats etc. Therefore, the facts of the disputed transactions have to be examined in this backdrop to ascertain the true nature of transaction. As regards the transfer of land to Satyam Builders, he noted that the plot of land in question at the time of the original agreement was agricultural land and no construction was possible without usage conversion. The vendors had already filed prescribed returns under ULCA in respect of their respective holdings. After enactment there were effective and subsisting orders of the competent authority u/s.8(4) of the ULCA declaring a part of the said land as surplus vide his order passed on 30.05.1978. Since various owners also owned different other plots of land admeasuring an area in excess of the limit prescribed under the ULCA and to get over the acquisition by the Government made application u/s.20/21 of the said Act for permission to retain surplus land for the purpose of construction of dwelling units for the weaker section of the society. After the order of the ULCA authorities, vendors were left with small portion of land with them and the balance surplus land factually vested with the Government or could have been dealt with other manner prescribed under the ULCA if and only if permitted by the authorities. This agreement with the assessee was only in respect of the plot of land, which was surplus under the ULCA and the area of land, which the owners were permitted to retain or would be permitted to retain in their own rights was not covered by this agreement. The agreed consideration was decided on the basis that some part of the plot of land after development and about 10% flats were required to be given to government at the stipulated conditions and in case of withdrawal of these conditions, the consideration was to be enhanced accordingly. The developer had no right to transfer his rights to a third party though he was permitted to engage contractors etc but the overall responsibility was of the developer. In short, assessee had no right in present as no development right existed at that point of time. The assessee acquired a future contingent right to develop the property if it was released by the appropriate State authority for housing for weaker section. On the date of agreement, there was nothing available for transfer to the assessee as the area of land within the permissible ceiling limit was retained by the owners and surplus land was required to be surrendered to the government. Thus he was of the opinion that on the facts and circumstances of the case, there is no possibility of any builder buying such right as a business venture. There is a fundamental and basic difference between business asset and investment, though both are acquired with profit in mind. Profit on any business asset is derived by putting in entrepreneurship, labour and skill. On the other hand, the profit on investment is dependent upon favourable market conditions. Profit in the present transaction was not dependent upon building skill of the assessee but on government approval and setting of disputes etc. AS such the land in question till the assessee receives full clearance of the competent authority could not be considered for any business purpose and as such could not be a part of assessee’s stock in trade but could only be termed as an investment. He noted that after purchase no development has resulted and it has been reflected in the balance sheet as an investment.

16.1 She further held that no business profit could at all be assessed because the said plot of land was not stock-in-trade but was acquired by with an intention to hold it for a long period and not for the purpose of business development. Therefore, transfer of the said lot of land has to be assessable as long term capital gains. As regards to the year of taxability he noted that sale deed executed with Satyam Builders show the total consideration of Rs. 4,00,60,000/- to be paid in stages up to the current financial year and the assessee has received only 75% of the consideration. The possession of the property has not been parted with and the agreement is subject to various time frames, rules for payment and transfer of any governing body required. He therefore, noted that in view of provisions of sec. 2(47) of the I T Act read with Sec. 53A of the transfer of property Act. The transfer is incomplete. Therefore, capital gain shall be charged when the sale agreement is executed in full.

16.2 Similarly as regards to transfer of land to M/s Braham Builders he held similar view by holding as under:

“I have carefully considered all the agreements, orders by the various authorities, facts and paper book I have carefully examined the contention of the appellant and the order of the Assessing Officer. I find that the contention of the appellant that the said land would fall under the definition of capital asset and not qualify as stock in trade is acceptable. This is because the history of the land shows that at no point of time before the sale of Brahma Builders on 2.2.2005 could the land be termed as otherwise as agricultural and non buildable on account of the various disputed pending on it. Because of this fact it cannot at any given point of time be considered as stock in trade. The appellant has submitted at necessary documents to state his case. As discussed in details in the case of Satyam Builders the same principles would apply for this piece of land. It is therefore being held that the plot was a capital asset and any transactions on it is be considered under the head capital gains to be taxed in the year the transfer takes place within the meaning of sec. 2(47) of the I T Act i.e. as and when the possession of the land is handed over and the sale agreement concluded. On the same reasoning as is given for the earlier ground of appeal for sale of the plot of land to Satyam Builders and holding the same conclusion arrived at therein the assessing offer accordingly is directed to tax the surplus arising on transfer of the said plot of Brahman Builders as long term capital gain in the assessment year relevant to the previous year when the last instalment other than the amount to be received at the time of execution of the conveyance deed as mentioned in the development agreement is received by the appellant. The alternative submissions that even if it is presumed that both the transactions were business transactions, the entire agreed considerate could not be taxed in one year become now becomes in- fructuous and academic in view of the above discussion and findings. The ground of appeal is therefore allowed.”

16.3 Aggrieved with such order of CIT(A), the revenue is in appeal before us.

17. The ld. D.R., while arguing all the grounds of appeal from 3 to 12, referred to the order of the AO at pages 1 to 6, paras 2 to 22. Referring to para 2 of the assessment order, he submitted that the assessee is a partnership firm engaged in the business of construction of shops and flats and developers. He submitted that the assessee during this year had transferred three properties and the income of the same has rightly been treated by the AO as business income and brought to tax the same during the impugned assessment year. Referring to page 2 of the assessment order, he drew the attention of the Bench to the letter addressed by the assessee to the Assessing Officer where it has been submitted that the firm in principle agreed that the sale of land has to be considered as business income. Before the CIT(A), the affidavit of the Chartered Accountant, Mr. Sharma, has been filed on the ground that the counsel Mr. Sharma has never conceded before the AO that the income has to be treated as business income. He submitted that the AO in his remand report has objected to this affidavit. The ld. D.R. further submitted that it cannot be said that for some portion the counsel for the assessee is authorized and for some other portion he is not authorized.

18. So far as ground nos. 3 to 7 relating to taxation of the surplus of Rs. 3,19,97,000/- arising on transfer of the plot to Satyam Builders as “capital gain” as against “ business income” treated by the AO are concerned, the ld. D.R. submitted that the CIT(A) has not examined the issue properly. He submitted that the documents clearly show that the land is acquired for development. The developers know what type of land is to be acquired. Referring to Serial No.2 of the Index in the paper book which shows photocopy of the development agreement for plot Survey Nos.109 and 110 between the assessee firm and M/s. Satyam Builders registered on 18-08-2004 and placed at paper book pages 4 to 31, he drew the attention of the Bench to internal page no. 7 of the agreement (paper book page no.13). He submitted that it is now mandatory to give a history of the property. Referring to the internal page no.7, he submitted that Gulab Waghire and others have granted the development rights in favour of the assessee M/s. Rajesh Builders for an area admeasuring 12 acres 7 gunthas from out of the said land vide Articles of Agreement dated 21-10-2003 registered at the Office of the Sub-Registrar Haveli V at Serial No.7227. They have also executed a Power of Attorney in favour of the nominees of the Developers duly registered at Serial No. 7228 on the same day.

19. He submitted that the assessee is in the business of development of property, the development right was given for the purpose of development to the assessee. Therefore, the assessee acquired first right for the purpose of development only. It can never be a capital asset since the property was acquired by the assessee for the purpose of development whose business is that of construction of shops and flats and developers. Referring to page no. 4 of the assessment order, the ld. D.R. drew the attention of the Bench to the various decisions relied on by the AO to the proposition that the sale of land by the assessee in the instant case has to be assessed as business income. Referring to page 230 of the paper book read with para 4 of the assessment order, he drew the attention of the Bench to the treatment given by the assessee in its books of account, according to which the assessee has considered such profit on sale of land as business income but only in the computation it has treated the same as capital gain.

20. Referring to the balance-sheet as on 31-03-2004, a copy of which is placed at paper book page no. 239, the ld. D.R. drew the attention of the Bench to the third item on the assets side which shows the Pimpri land at Rs. 1,18,20,841/-. The assessee has not separately shown such land under the head ‘stock in trade’. Although accounting can be in several manners, the assessee has not shown those development rights as capital asset. Referring to the decision of the Tribunal in the case of Smt. Rekha Khandelwal vs. ACIT vide ITA No.785/Mum/09 order dated 17-03-2010 for the asstt. year 2005-06, the ld. D.R. submitted that the intention at the time of acquisition of a property is more decisive for the purpose of treating an asset as capital asset or business asset. He submitted that stock in trade does not convert to capital asset merely because they are held for a long period. Giving an example, he submitted that if a Builder cannot sell 3 or 4 flats out of a large number of flats for some time, they have to be treated only as stock in trade and not as capital asset. He accordingly supported the order of the AO in treating the income from sale of land to Satyam Builders as business income.

21. As regards the grounds of appeal nos. 8 to 11 relating to the order of the CIT(A) in directing the AO to tax the surplus of Rs. 3,07,81,300/- arising on transfer of the plot to Brahma Builders as capital gain, he submitted that the same arguments, as per grounds of appeal nos.3 to 7 are applicable to these grounds. Referring to Serial No. 11 of the Index which shows the photocopy of the development agreement dated 02-02-2005 entered into between the assessee firm and Brahma Builders for plot of land at Survey No.13 Hissa 1 along with a copy of Power of Attorney dated 10-11-2004, copies of which are placed at paper book page nos.185 to 212, the ld. D.R. drew the attention of the Bench to internal page no.4 of the agreement (paper book page no.191), according to which the consenting party along with Mr. Govind Gopal Jagtap have vide agreement dated 09-04-1990 granted the development rights of the said property to the first party i.e. Rajesh Builders. Referring to the said page, he further drew the attention of the Bench to the 4th para, according to which the consenting party has obtained the non-agricultural use of the said property from the Collectorate, Pune, vide two separate orders issued under No.PRN/SR/640/90 dated 27-11-1990and No.PRN/NA/SR/494/91 dated 09- 03-1992. He submitted that the above facts negate the finding of the CIT(A). He submitted that since the conversion has taken place much before, the finding of the CIT(A) is incorrect and contrary to facts. He submitted that the CIT(A) has not examined the facts properly. In fact, he did not do the proper verification which the AO has done. He submitted that the assessee is developer, acquired land for development and transferred the development rights for development only. Therefore, the income therefrom has to be treated as business income. The acquisition of such development rights was stock in trade and remains as stock in trade only.

22. As regards the ground of appeal nos. 7 and 11, which relate to the year of taxability of the profit arising on sale of land to Satyam Builders and Brahma Builders, the ld. D.R. referred to page 6 para 22 of the assessment order and submitted that the AO has given a clear-cut finding that the buyer, being developers, got possession of the property. The assessee is following mercantile system of accounting and the registration was made during the year. He submitted that in a trading concern, when the stock is transferred, the income accrues to the assessee in the same year. The receipt of payment is immaterial since the amount received in subsequent years is just a deferment of the payment. Referring to pages 19 to 21 of the order of the CIT(A) where he has held that the plot of land was not stock in trade but acquired by the assessee with an intention to hold it for a long period and not for the purpose of business of development and the amount was not assessable at all during the relevant period due to non-receipt of the full sale consideration, the ld. D.R. submitted that the above finding given by the CIT(A) is factually incorrect. He submitted that since the assessee here is a developer and purchased the development rights which were subsequently sold, the income has to be treated as business income. Further, registration has already been made, possession taken over by the party, 75% of the consideration already paid and the assessee follows the mercantile system of accounting and therefore the year of full and final payment is immaterial and the transaction has to be treated as complete in every respect. He submitted that the CIT(A) has not seen the document properly and simply passed the order. Referring to page 17 of the paper book, he drew the attention of the Bench to the effect that the assessee on the execution of the agreement on 16-08-2004 has taken peaceful and vacant possession of the said property for their exclusive use and occupation for development purposes only as contemplated for development purposes and for that purpose the developers have issued post dated cheques amounting to Rs. 3,29,00,000/- over and above the payment of Rs. 1,30,00,000/- earlier and the balance of Rs. 1,00,000/- to be paid upon execution of the final deed of conveyance in favour of the Developers upon completion of the development activities on the said property. He submitted that the transfer was a conditional transfer. Therefore, the CIT(A) was not correct in holding that the said amount was not assessable at all during the relevant period due to non-receipt of the full sale consideration. The ld. D.R. further submitted that the assessee itself has accepted this income during this years since the agreement was made and registered during this year and possession was given during this year. Therefore, the income being revenue in nature has to be brought to tax during this year only. He accordingly supported the order of the AO.

23. The ld. counsel for the assessee Shri S C Gupta on the other hand, strongly relied on the order of the CIT(A). He submitted that the AO disallowed the claim of the assessee on the basis of the letter of the Chartered Accountant. Referring to para 2.1.1 at page 3 of the CIT(A)’s order, where the concerned part of the letter written by the Chartered Accountant is incorporated including the decision of the Bombay High Court in the case of Chaturbhai Dwarkadas Kapadia, he submitted that the CIT(A) has rightly held that the letter of the assessee or its subsequent withdrawal should have no effect on the case which should be examined on merits to arrive at the correct income under the correct head of taxation.

24. So far as the sale of land to Satyam Builders is concerned, the ld. counsel for the assessee Shri S C Gupta referred to the deed of agreement between Gulab Sadhu Waghire and others and M/s. Rajesh Builders dated 23- 09-1984, a copy of which is placed at paper book page nos.33 to 42, he submitted that the right of the assessee starts from this agreement. He submitted that the owner of the land was the Waghires and the purchaser is M/s. Rajesh Builders as the Developers. Referring to paper book page 34, he submitted that the land was under the control of Urban Land Ceiling Act. Referring to internal page no. 6 of the agreement placed at paper page book page no. 35, he drew the attention of the Bench to clause 3 of the said agreement, according to which the assessee has got a right only if the Govt. sanctions, otherwise the assessee does not have any right. Therefore, the right acquired by the assessee is a future contingent right. Referring to page 40 of the paper book, he submitted that the property was a disputed property on the date of the agreement. Referring to pages 50 to 55 of the paper book, he drew the attention of the Bench that it is a supplementary agreement dated 10-02- 1992. Referring to page 60 to 77 of the paper book, he drew the attention of the Bench to the copy of the development agreement and the various clauses therein. Referring to page 67 of the paper book (internal page 10 of the agreement), he submitted that there is further encumbrance on this land. He submitted that it was an agricultural land and no development was permissible. The assessee wanted to invest for future profits. Even if it was to be treated as stock in trade, it was capitalised. He submitted that under identical circumstances the Tribunal in assessee’s own case in the preceding year has decided the issue in favour of the assessee and treated such income as capital gain as against business income treated by the AO and upheld by the CIT(A). He submitted that the right of the assessee in the property cannot be called a trading right so as to be called as stock in trade. Referring to the decision of the Delhi High Court in the case of L. Bansidhar & Sons vs. CIT reported in 123 ITR 58, he submitted that contingent contract to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened.

25. The ld. counsel for the assessee Shri S C Gupta submitted that even if the said plot of land was acquired as a business asset in the beginning, yet it got converted into a capital asset as it got sterilised. When the asset is sterilised, it got converted into a capital asset and only capital gains tax could be chargeable. For this proposition, he relied on the following decisions:

1. CIT vs. Canara Bank Ltd. (63 ITR 328) (SC).

2. Universal Radiators (201 ITR 800) (SC).

3. CIT vs. Anand Lamps (207 ITR 733) (Raj.).

4. Banarsi Das Gupta vs. CIT (1977) 106 ITR 559 (All.).

He submitted that the Tribunal in the assessee’s own case has already decided the issue in favour of the assessee. Referring to page 232 of the paper book, which is balance-sheet as on 31-03-2005, he submitted that on the assets side the assessee has shown the land. Referring to page 239 of the paper book, which is the balance sheet as on 31-03-2004, he submitted that land has been shown under the head “assets”. Referring to page 93 of the paper book, he submitted that the agreement has been made on 14-03-1988 between Mukand

G. Jagtap and the assessee. Referring to page 94 of the paper book, he submitted that the land was under Urban Land Ceiling Act. Referring to page 129 of the paper book, he drew the attention of the Bench to the supplementary agreement, according to which Mr. Mukundrao Ganuji Jagtap and Mr. Kisan Ankushrao Bhalerao have sold the development rights to 4 others. Referring to page 178 of the paper book, he submitted that it was a nirank land and there was no approach road to the property. Referring to paper book page no. 181 and 182, he submitted that approach road was available to the property only on 10-08-2005. Referring to page 191 of the paper book, he submitted that as per the final agreement between the assessee and Brahma Builders, the dispute with owners of the land was settled only on 19-04-2004. He submitted that originally the asset was not purchased as a trading asset. Even if it was purchased as a trading asset, it got sterilised. Since the Tribunal has already allowed the claim of the assessee in the preceding year, the order of the Tribunal has to be followed. As regards the year of taxability, the ld. counsel for the assessee supported the order of the CIT(A) as per page 19 of her order.

26. The ld. counsel for the assessee submitted that the intention of the assessee was investment only. The assessee had indirectly purchased the land through the development agreement and the intention of the assessee was always for investment only. There were lots of burden on the transferee and there are various clauses in both the agreements. Therefore, it was a conditional transfer.

27. The ld. D.R., in his rejoinder, submitted that the assessee got absolute right over the property during this year. Referring to the copies of the agreement, supplementary agreements, etc., he submitted that everywhere it is seen that the assessee has acquired development right only for the purpose of development. Refuting the contention of the ld. counsel for the assessee that lots of risks were there in the property concerned, the ld. D.R. submitted that risks are inherent to business only. Since there was no approach road, the land was under the Urban Land Ceiling Act and conversion was made from agriculture to non-agricultural purpose and, therefore, all these risk factors do indicate that it is a business asset. The intention of the assessee at the time of acquisition of the property is for business only since the assessee is a firm constituted for doing development, purchase development rights and sell such development rights etc. Therefore, the entire activity is that of business activity and the income therefrom has to be treated as business income. He submitted that mere entries in the books of account are not decisive and the nature and character of the transaction is material

28. As regards the contention of the ld. counsel for the assessee that the order of the Tribunal in the assessee’s own case for the preceding year has to be followed, he submitted that the case was decided by the Tribunal on the basis of its own facts for that year. It was a separate property and documents of that year are not given. Further, the order passed by the Tribunal is not a good and correct order. Therefore, the same need not be followed.

29. The ld. counsel for the assessee, while winding up his arguments, submitted that if the Bench is not going to follow the order of the Tribunal in the assessee’s own case in the preceding assessment year, then the matter may be referred to a Special Bench.

30 We have considered the rival submissions made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee in the instant case is engaged in the business of construction of shops, flats and developer. There is also no dispute to the fact that the assessee has declared surplus on transfer of land to Satyam Builders amounting to Rs. 3,19,97,000/- and surplus on transfer of land to Brahma Builder at Rs. 3,07,81,300/- as capital gain. There is also no dispute to the fact that the Assessing Officer treated such surplus and transfer of land to Satyam Builders and Brahma Builders as business income. We find the CIT(A) held that such surplus on transfer of land to Satyam Builders and Brahma Builders is income on sale of development rights and has to be treated as capital gain. While doing so, she further held that the surplus arising out of sale of development rights to Satyam Builders would be assessable as long term capital gain in the year in which the agreement is fully executed and in the case of Brahma Builders as long term capital gain in the assessment year relevant to the previous year when the last instalment is paid.

31 It is the submission of the ld DR that such income should be treated as business income only since the assessee during the course of assessment proceedings through its counsel agreed in principle that such surplus has to be treated as business income and brought to tax in the impugned assessment year. Further, since the assessee is engaged in the business of builder, developer, contractor, estate agent etc. therefore, such transfer of development rights by the assessee will amount to business and the surplus on such transfer has to be treated as business income. It is the submission of the ld counsel of the assessee that much importance should not be given to the letter of the Chartered Accountant since an affidavit filed by Shri Manmohan Sharma mentions that he has never conceded or admitted surplus arising on transfer of land to Satyam Builders and Brahma Builders should be assessed as business profit. Further, it is the submission of the ld counsel of the assessee that even if it is held that land as business asset in the beginning yet it got converted in to capital asset as it got sterilised. According to him when the asset is sterilised it got converted in to capital asset and capital gain tax would be chargeable. Since the full consideration has not been received by the assessee during the impugned assessment year; therefore, it cannot be brought to tax under the head ‘capital gain’ in this year. Further, it is also the submission of the ld counsel for the assessee that in view of the decision of the Tribunal in assesee’s own case in the immediately preceding assessment year, this issue is covered in favour of the assessee and it has to be followed.

32 We have considered the rival submissions and the order of the Tribunal in assessee’s own case in the immediately preceding assessment year. It is the settled proposition of law that principles of res-judicata do not apply to Income Tax Proceedings and every assessment year is separate and independent. In the instant case, we find, the assessee before the CIT(A) has also pleaded that the facts of each plot of land are different and an issue decided on facts in one year cannot be applied in the subsequent year on another plot of land unless all the facts are similar. The relevant portion of the observations of the CIT(A) at page 16 of her order containing the submission by the assessee before her reads as under:

 “He also pleaded that the facts of each plot of land are different and an issue decided on facts in one year cannot be applied in the subsequent year on another plot of land unless all the facts are similar. In the said assessment year none of the revenue authorities brought on record by way of any evidence that the appellant assessee purchased the said plot of land for development as a business venture or had any such intentions when the same was purchased or it could be so devolved. They misguided themselves merely because the appellant assessee is otherwise a builder ignoring that every appellant assessee can hold similar asset at any particular time in to capacities; one as investment and other as stock-in- trade. Thus, the counsel pleaded that the findings of the said assessment year cannot be followed in this assessment year.”

33 We find the CIT(A) while adjudicating the issue in favour of the assessee also held that the decision taken by the CIT(A) in assssee’s own case for the Assessment Year 2004-05 cannot be applied in this assessment year, which according to her is different during this year on facts. The relevant portion of the findings of the CIT(A) at page 16 of her order reads as under:

 “16. I have carefully considered the order of the Assessing Officer and the contention of the appellant along with the judgments cited and the documents submitted. I find that the decision taken by the CIT(A) in the case of the appellant assessee for the Assessment Year 2004-05 cannot be applied in this assessment year without looking into the facts and which are admittedly different in this year has been explained herein above. The principle of res-judicata is not applicable to the income tax proceedings and facts in each assessment year need to be examined fresh without being influenced from the decisions in the earlier assessment years. It is apparent from the assessment order that the Assessing Officer decided the case without investigating and without analysing all the facts of the case simply on the basis of the assessments done in the previous year and on relying on the letter submitted by the ld AR of the appellant.”

34 Thus, in view of the submissions by the assessee before the CIT(A) and the findings given by the CIT(A) in her order that the facts of the current assessment year are different with that of the preceding assessment year; therefore, the decision of the Tribunal in assessee’s own case in the immediately preceding assessment cannot be followed. Undisputedly the order of the Tribunal was not available before the CIT(A) when she passed the order. Precisely for this purpose, the assessee appears to have stated before her that the facts of the case in the impugned assessment year are different from the preceding assessment year which the CIT(A) has agreed. Now, since the Tribunal has given a favourable order in favour of the assessee, the counsel is making a u-turn by asking the Bench to follow the order of the Tribunal which in our opinion is not justified. Therefore, the arguments of the ld counsel for the assessee that in case the order of the preceding year is not followed, the matter may be referred to the Special Bench does not find any force. Accordingly, the request of the ld counsel for the assessee to refer the matter to the Special Bench is rejected.

35 Now, coming to the merits of the case, we find the agreement of plot at survey no. 109 & 110 between the assessee firm and Satyam Builders has been registered on 18.8.2004. Similarly, the development agreement dated 2.2.05 entered between the assessee firm and Brahma Builders for the plot of land at Survey no.13 has been registered on 9.2.2005.(Paper Book page 185)

35.1 From the copy of the reconstituted partnership deed dated 1.4.1996 we find the nature of business is that of builders, developers, contractors, estate agent etc. Further, documents filed in the paper book show that the land has been acquired for development and development rights only for the purpose of development. Therefore, when the assessee transferred the development rights for development, only, any profit arising on such transfer, in our opinion, has to be assessed as business income.

35.2 In our opinion, the contention of the ld counsel for the assessee that the intention of the assessee was investment only since transfer was conditional one due to liability of burden on the transferee and number of clauses in the agreement has no force in it. In our opinion only a business man takes the risk of buying a property for the purpose of business and no prudent businessman will invest in any property as a capital asset, which has got so many constraints. In our opinion, the intention of the assessee at the time of acquiring the land or development rights therein and his conduct is relevant. Merely because the asset has been held for quite some time does not change the character of the asset.

35.3 From the copy of the agreement between the Waghires and M/s Rajesh Builders on 23.9.84 (PB 33 onwards), relating to the land transferred to Satyam Builders, we find the assessee who is termed as a “developer” and who was aware of the fact that the owners had applied for permission to retain the said land for construction of dwelling units for weaker section had acquired the land for development. The relevant clause of the agreement reads as under:

 “AND WHEREAS the Developers are professional builders and developers and also assured to the owners that they have the knowledge and ability for construction of houses which can be used for the weaker sections of the society and also assured the owners that they have the ability of pursuing the matter with the governmental and obtaining the NOC/Permission/Exemption from the Government of Maharashtra and also to compete the scheme.”

35.4 We find clause 4 of the said agreement also reads as under:

 “The entire costs and risks of the developers of the said development and the entire benefits and risks of the profits and/or loss whatsoever out of the said schemes and/or non-sanction of the said schemes shall be of the developers alone.”

35.5 Similarly from the copy of the agreement between Mr Mukund G Jagtap and M/s Rajesh Builders dated 14.3.88 (PB 93 onwards) and relating to the land transferred to M/s Brahma Builders we find clause I of the said agreement reads as under:

 “The owner herein entrust the development rights of the said plot in favour of Developers and ultimately sale, transfer and convey in favour of Dinanath Co-op Housing Society (proposed) the buildings and land constructed thereon as under:

a) PHASE A:

That the Developer shall construct on the Phase A on the surplus land out of the said plot for the benefit of the members of the Dinanath Coop Hsg Socy (Proposed) and hand over total built-up of 30,960 sq.ft area to the proposed society. The area of the each flat is 430 sq.ft built-up and the total flats are 72 to be allowed of 30,960 sq.ft built-up will be decided by the owner and the developer mutually.-The specification to be provided in each flat is attached herewith:

b) PHASE B

That the Developer shall construct under Phase B under free hold land out of the said land simultaneously with the surplus land to be developed under Phase A above.

However, till the completion of the flats in the Phase A above, the Developer shall give possession of about 12, 000 sq.ft built-up of Phase B to the Society members as per direction of the owner herein. However, these flats will be surrendered by the Society members to the developer on completion and receipt of their respective flats in Phase A and such a member shall shift forthwith without claiming any right title or interest in the flats under Phase B.”

35.6 Clause 4 of the said agreement says that the developers i.e. M/s Rajesh Builders agree that they shall get the NA permission of the said plot from the authorities concerned at his own cost and expenses.

35.7 We find the relevant clauses of the agreement transferring the development rights to M/s Satyam Builders read as under:

 “And whereas the said Gulab Waghire and others have granted the development rights in favour of M/s Rajesh Builders for an area admeasuring 12 acres 7 Gunthas from out of the said land vide articles of agreement dated 21.10.2003 registered at the office of the Sub-Registrar Haveli V at serial no.7227 and also executed a Power of Attorney in favour of the nominees of the Developers duly registered at serial no.7228 on the same day.

And Whereas thus the aforesaid first party no.1 entrusted their respective lands for development in favour of the first party no.11.

And whereas the first party no.1 herein and said Shri Savlaram Dinaji Waghire have also executed General Power of Attorney in favour of Shri Rajamani Ramdularsingh to do all acts, deeds and things in order to develop the said properties in the best possible manner.

And whereas the First party in lieu of the rights vested unto them are now desirous of further transferring the development rights in terms of the development agreements and powers vested by virtue of irrevocable power of attorney of an area admeasuring 22174 sq.mtrs. .e 5.22 acres out of the said land and which portions hereinafter referred to as the “said property” more particularly described in the schedule II hereunder to the Developers herein on terms and conditions herein below stipulated.”

35.8 Clause 2 of internal page 9 of the said agreement says that there is absolute transfer of the said property including the development rights to M/s Satyam Builders.

35.9 A combined reading of the various clauses of the agreement starting from the beginning till the date of transfer of the development rights to Satyam Builders and Brahman Builders for the purpose of development by the assessee firm which itself is engaged in the business of developers gives an impression in the mind that the land was acquired for the purpose of business, transferred as a business asset and therefore, the surplus has to be assessed as business income only. We, therefore, don’t find any sound reasoning in the order of the CIT(A) that it is for the assessing officer to discharge the onus that the property sold to M/s Satyam Developers was not a business asset.

35.9.1 We find the CIT(A) while accepting the contention of the assessee that the mode of purchase of land is capital asset has observed as under:

 “Entering into a development deed and obtaining physical possession of land while the PoA for all other legal purposes resting with the seller is a policy followed by land investors in and around Mumbai and has been an accepted policy”

However, we do not find any sound reasoning in the above observation of the CIT(A) especially in absence of any notification by the Government or any decision in this regard.

35.10 We find the CIT(A) at para 22 of her order while deciding the issue relating to transfer of land to Brahma Builders has noted that the history of land shows that at no point of time before the sale to Brahma Builders on 2.2.2005 could the land be termed as otherwise than agricultural. However, the copy of the agreement dated 2.2.2005 between Rajesh Builders and Brahma Builders placed at paper Book page 190 and 191 read as under:

 “WHEREAS all that piece and parcel of land bearing S No.13 Hissa No.1 admeasuring about 17,000 sq.mtrs situate at Vuillage Kondhwa Khurd, within the limits of PUne Municipal Corporation, Taluka Haveli, District Pune more particularly described in the Schedule I hereunder and hereinafter for sake of brevity referred to as the “said land” stands in the name of and belongs to the consenting Party who are the owners thereof.

AND WHEREAS the consenting party along with Mr Govind Gopal Jagtap have vide agreement dated 9th April 1990 granted the development rights of the said property to the First Party hereinabove.

AND WHEREAS after the death of Mr Govind Gopal Jagtap his legal heirs and Sahebrao Jagtap executed a Supplementary Agreement confirming the said agreement power of attorney dated 9.4.1990 and acknowledged and confirmed the receipt of full consideration due and payable to them from the First Party.

AND WHEREAS the First Party also paid 50% of the value of the land for conversion of the same to freehold from old tenure to the Appropriate Authority.

AND WHEREAS the consenting party have obtained the Non agricultural use of the said property from the Collectorate Pune vide two separate orders issued under No.PRN/SR/640/90 dated 27.11.1990 AND No.PRN/NA/SR/484/91 dated 9.3.92.

AND WHEREAS disputes arose between the owners and first party herein and the first party filed a special civil Suit no.734/01 in the Court of the Civil Judge, Senior Div Pune against the Consenting party i.e the owners.

AND WHEREAS after various negotiations the parties hereto settled and compromised the said matter vide the compromise Purshis on 19.4.2004 wherein the consenting party agreed and declared that the first party is absolutely entitled to construct and sell the units in the building/s to be constructed upon the said land and are well and sufficiently entitled to develop/sell land or part or parts thereof to any third party for their own benefit.

AND WHEREAS THE First party with consent of the owners are now desirous of developing a portion of the said land admeasuring 102650 sq.ft and which portion of 102650 sq. Ft is hereinafter referred to as the “said property” more particularly described in the schedule II hereunder and duly earmarked on the annexed plain and have therefore agreed to grant the development rights to the Developers herein on terms and conditions herein below stipulated.”

From the above, it is clear that the land was not agricultural as per the order of the collector, Pune and therefore, the finding of the CIT(A) is based on wrong appreciation of facts. The various case laws relied on by the CIT(A) are distinguishable and based on facts of those case, they cannot be applied to the facts of the present case. As already mentioned earlier, the decision of the Tribunal in assesee’s own case is not applicable since the facts are different, a finding given by the CIT(A) on the basis of the admission by the assessee. In the case of Shanti Builders (88 TTJ 519, Pune) relied on by the ld counsel the same related to a 263 matter and the facts of that case are distinguishable and not applicable to the facts of the present case. In this view of the matter, we hold that the surplus arising on transfer of land to Satyam Builders and Brahma Builders as business income. The order of the CIT(A) on this issue is accordingly set aside and the grounds raised by the revenue are allowed.

35.11 As regards to the year of taxability, we find the assessee itself has accounted for the income during this year. The computation of income shown by the assessee shows profit on sale of land which is as under:

COMPUTATION OF INCOME

Income from business:
Net profit as per profit & Loss accounts		70,390,653
Less : Items considered separately:
FD Interest	602,828
Profit on sale of land	69,675,831	70,278,659	111,994
INCOME FROM OTHR CAPITAL GAIN:
Long term capital gain Balance sale proceeds received		69,675,831
Less: Exempt u/s 54 EC		69,675,831	Nil
INCOME FROM OTHER SOURCES
FD interest			602,828/-
Total Income			714,822/-
ROUNDED OFF u/s 288A			Rs. 7,14,820/-
TAX ON 714,820		250,187/-
Add: Surcharge @ 2.5% 6,255/-		256,442/-
Add Education Cess @ 2% 5,129/-		261,571/-
Less: Advance Tax		300,000/-
Refund due		38,429/-

We find the agreements were made and registered during this year and the possession has been given during this year which is evident from the clauses of the agreement. The assessee is following mercantile system of accounting. Therefore, the income has to be brought to tax during this year only. The finding of the CIT(A) that the possession was not given, in our opinion is incorrect. In this view of the matter, we are of the considered opinion that the Assessing Officer was justified in adding the surplus on transfer of land to Satyam Builders and Brahma Builders as business income to be taxed during the impugned assessment year. Accordingly, the order of the CIT(A) on this issue is set aside and the grounds of appeal nos 3 to 11 are allowed.

36 Ground no.12 reads as under:

“On the facts and circumstances of the case and in law, the ld CIT(A) has erred in directing to treat the surplus of Rs. . 49,03,620/- received from Balkrishna Raghunath Waghare on account of return of land without appreciating the fact that land transaction entered into by the assessee are solely with the propose of business as he is either developing the property or selling it without development”

36.1 The facts of the case, in brief, are that during the year the assessee had returned certain land purchased from Waghire. As per court order of Civil Judge, Pune dated 04.08.2004 the assessee has returned certain land to Waghire.

Total returned price	Rs. .70,00,000/-
Total cost as per assessee	Rs. .20,98,380/-
The taxable amount works out to	Rs. .49,03,620/-

36.2 Since the agreement is dated 4.8.204 and since the assessee is following mercantile method of accounting, the Assessing Officer held that the surplus amount of s. 49,03,620/- has to be brought to tax during this year. He accordingly taxed the amount of Rs. 49,03,620/- as business income for the impugned assessment year.

36.3 Before the CIT(A), it was submitted that in September, 1984, the assessee entered into an agreement with one, Shri Raghunath Waghere and acquired development rights of plot. For this, certain payments were made. Further, after the said payment, various disputes on the said land arose and the assessee filed a Civil Suit on 11.04.2002 in the Civil Court Pune. A consent decree was passed by the learned Civil Judge on 04.08.2004, whereby the assessee was awarded Rs. .70 lacs to relinquish all the rights and titles and other interest on the said land stating that the possession of the property which had always remained with the Waghires would remain with them. As the assessee had paid Rs. .20,98,380/- in the initial period for the property, it has offered Rs. .49,03,620/- for taxation as business income in the return of income. The assessee has now relying on the pronouncements of the jurisdictional Courts considered the surplus of Rs. .49,03,620/- arisen from award of Civil Suit as capital receipt for which capital gains tax was to be paid. It was contended that on account of the litigation pending, the assessee never got the possession of land in any way and because of this reason there could be no business that could be started on it. What he had was only a legal rights to sue specific performance and on the basis of this any receipt on account of this legal rights would not be business at all. It was further contended that the Assessing Officer has wrongly considered it as business income. It was submitted that a mistake of assessee in not disclosing income correctly can be corrected and the same should be allowed. It is definitely legal right of every assessee to correct his mistakes and make fresh legal claim even if he has shown income in his voluntary return of income. The decision of the jurisdictional Bombay High Court in the case of Mr. Balmukund Acharya vs. DCIT reported in 2009-TIOL- 05-HC-MUM-IT cited before the CIT(A). It was submitted that the Apex Court and the various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. If particular levy is not permitted under the Act, tax cannot be levied applying the doctorine of estoppel.” It was submitted that on merits also, the case must go in favour of the assessee since the surplus was taxable as capital gains. The decisions of Bombay High Court in Sterling Investment 123 ITR 441 (Bom), Vijay Flexible 186 ITR 693 (Bom) and CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom) were cited to support the case of the assessee.

36.4 Based on the arguments advanced by the ld counsel for the assessee and the decisions cited before her, the CIT(A) allowed the claim of the assessee by holding as under:

4.1 I have carefully considered the contention of the appellant and the order of the Assessing Officer on this point. I find that the order of the Assessing Officer simply stated as under:

 “During the year the appellant assessee had returned certain land purchased from Waghire. As per Court order of Civil Judge, Pune dated 4.8.2004 the appellant assessee has returned certain land to Waghire.

Total returned price	Rs. 70,00,000/-
The cost as per appellant assessee	Rs. 20,98,380/-
The taxable amount works out to	Rs. 49,03,620/-

The appellant assessee as per the audit report is carrying on the activity of construction and development of building. The appellant assessee being a developer, the land acquired by it is not a capital asset but a business asset. Therefore, the profit on such amount would be liable to tax as business income instead of capital gain stated by the appellant assessee in the return. The firm in principle agrees that the sale of land is to be considered as business income (except the issues raised in A Y 2004-05 and matter is pending in ITAT Mumbai)”

4.2 I find that the order of the Assessing Officer is absolutely silent on the facts whether the assessee held possession of the land concerned or whether there was any business activity begun on it on account of such possession. In view of this, the copies of agreement and the court papers that were submitted by the appellant were examined. I find that the appellant’s contention regarding possession of land is acceptable. The appellant, I find never held the said land as a property. The conveyance was never affected for the appellant to have a legal right to start his business. In view of this, the said land not being in the possession of the appellant and on account of the fact that there was a dispute and “Civil Suit on the said land could not fall under the category of stock in trade of the appellant to render any income from it taxable u/s.28 of the I.T. Act. In fact as the appellant was not the owner of the land one cannot term the land as capital asset in the hands of the appellant. In fact what was a capital asset was the acquired assignable rights. In the balance sheet of the assessee for the concerned year, the assessee has declared holding of 5 plots of land as on 31.03.2004 along with three plots of land shown under the head current assets. The said land does not feature in the balance sheet at all. Therefore, to correctly appreciate the nature of transactions it would be necessary to rely on the judgments delivered by the Hon’ble Courts in such a case. I find the case of the appellant is squarely covered by the following judgments of Bombay High Court:

i) CIT vs Vijay Flexible Containers (1990_ 186 ITR 693 (Bom)

“The appellant assessee firm entered into agreement of purchase of immovable property and paid earnest money. Subsequently, in settlement of a suit for specific settlement of agreement of sale filed by the appellant assessee firm, is received compensation interest. Whether such amount is assessable as capital gains? Under terms of the agreement, the appellant assessee had acquired assignable right, which is in the nature of a capital asset. Amount received by him is in relinquishment of such capital asset. Capital gains arises from receipt.

ii) K R Srinath vs ACIT (2004) 268 ITR 436 (Mad)

“The court in the said judgment has clearly mentioned that it does not find any reason to differ from the finding arrived at in CIT vs Tata Services Ltd 122 ITR 594 (B0m) and CIT vs Sterling Investment Corporation ltd 123 ITR 441 (Bom) wherein relinquishment of righty the appellant subsequent to cancellation of sale and giving rise to compensation received is subject to capital gain tax.”

iii) CIT vs Tata Services Ltd (1979) 13 CTR (Bom) 227

4.3 The appellant has also relied on the judgment of the Hon’ble Bombay High Court in the case of Vijay Flexible Containers in its case and has stated that capital gains would arise on receipt of such compensation. In view of the discussion held above and respectfully following the judgment of the jurisdictional Hon’ble High Court the Assessing Officer is directed to treat the compensation of Rs. .70 lacs received on account of Civil Suit decree by the assessee in lieu of relinquishment, of all rights and titles in the Waghere land as a capital asset in the hands of the assessee and compute the capital gains accordingly as per the Income Tax Law and rules notwithstanding the stand taken by the assessee in his return of income filed. The ground of appeal on this issue therefore survives and is allowed.

36.5 Aggrieved with such order of the CIT(A), the revenue is in appeal here before us.

37 The ld. D.R., while supporting the order of the AO, submitted that the CIT(A) has relied on certain judgements which are not applicable to the facts of the present case. Referring to the Special Civil Suit No.301 of 2002, a copy of which is placed at paper book page nos.222 to 226, he drew the attention of the Bench to para 3 of the said decree, according to which an amount of Rs. 70 lakhs was received by M/s. Rajesh Builders from the Defendants in lieu of relinquishment of its right, title and interest in the said property. He submitted that any money coming to the assessee for compensation for trading asset cannot be treated as capital receipt. For this proposition, he relied on the decisions reported in 115 ITD 443 (Del.), 29 IR 910 (SC) and 111 ITD 259.

37.1 The ld counsel for the assessee on the other hand while supporting the order of the CIT(A) submitted that it is a civil suit filed by the assessee since the land was under the Urban Land Ceiling Act and possession thereof was never transferred to the assessee, ownership of the same was always with the owners. Therefore, the compensation received for giving up the right, title and interest in the said property has to be treated as a capital receipt and not brought to tax as business income.

38 We have considered the rival submissions made by both the sides. Perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case received the amount of Rs. 70,00,000/-from the defendants towards full and final settlement of the claim made by it. Clause 4of the said agreement (PB Page 223) shows that the plaintiff has relinquished all its rights, title and in interest acquired by it. It is the submission of the ld counsel for the assessee that due to filing of a civil suit and since the land was under ULCA and since possession was never transferred therefore, the compensation received is a capital receipt.

39 We find the Hon’ble Bombay High Court in the case of Bombay Burmah Trading Corporation Ltd (81 ITR 777) has held that where compensation is recovered for an injury inflicted upon a man’s trading, so to speak, a hole in his profits, the compensation would go to fill the hole and would be a trading receipt. On the other hand, where the injury is inflicted upon the capital asset of the trade making, so to speak, a hole in them, the compensation recovered is meant to be used to fill that hole and is a capital receipt. We find the Delhi Bench of the Tribunal in the case of Ansal Properties & Industries Ltd vs DCIT (115 ITD 443) following the decision of the Bombay High Court cited above has held such compensation as revenue in nature. Since the compensation in the instant case is for the loss of future profit that the assessee would have earned. By receiving such compensation, the assessee was not to go out of business or its profit making apparatus has not been taken away or restricted. Therefore, the receipt, in our opinion is revenue in nature. The various decisions relied on by the CIT(A) are distinguishable and not applicable to the facts of the present case. In this view of the matter we set aside the order of the CIT(A) and the ground raised by the revenue is allowed.

40 In the result, the appeal filed by the revenue is partly allowed.

Order pronounced on this 13th day of Oct, 2010.

 

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