These three appeals preferred by the Revenue against three separate orders passed by the ld. CIT(A), Mumbai for assessment years 2003-04, 2006- 07 & 2007-08 involve one common issue and the same therefore have been heard together and are being disposed of by this single consolidated order for the sake of convenience.
2. First, we shall take up the appeal of the Revenue for A.Y. 2003-04 being ITA No.4656/Mum/2009 which is directed against the order of the ld. CIT(A) XIII, Mumbai dated 16-6-2009.
3. The solitary issue raised by the Revenue in this appeal relates to the addition made by the A.O. on account of capital gain which has been deleted by the ld. CIT()A) and the same is raised in the form of following ground:-
"On the facts and in the circumstances of the case, the ld. CIT(A) has erred in law in deleting the addition of Rs. 1,14,72,446/- made in the assessment order on account of capital gain.
On the facts and in the circumstances of the case, the ld. CIT(A) has erred in not applying the correct law in as such as that the provision of section 45(2) of the I.T. Act viz. where a capital asset is converted into stock and the sale price of such stock is to be assessed as capital gain in the year of sale, is completely omitted to be considered by him in his order."
3. The assessee in the present case is an individual. Although he had filed his returns of income for assessment years 2004-05, 2005-06 and 2006-07 simultaneously on 31-07-2006, no return of income for the year under consideration i.e. A.Y. 2003-04 was filed by him. The A.O. received certain information from his counterpart in Bikaner viz. ITO 1(3), Bikaner vide letter dated 23-12-2007 and 19-02-2008 regarding two properties of land at Bikaner sold by the assessee during the previous year relevant to A.Y. 2003-04 for a sale consideration of Rs. 9 lakhs each against the value adopted by the Sub-Registrar for stamp duty at Rs. 27,50,000/-. As per the said information received by the A.O., the provisions of section 50-C of the Income Tax Act, 1961 (the Act) were applicable in the case of the assessee. The A.O., therefore, issued notice u/s 148 of the Act in response to which return of income for A.Y. 2003-04 was filed by the assessee on 3-4-2008 declaring total income at Rs. "nil". During the course of assessment proceedings, it was submitted that the assessee is engaged in the business of dealing in plots of land. It was submitted that he had inherited ancestral land in Bikaner from his parents in and around year 1992 and the same was converted by him into stock-in-trade in the year 1999 with the intention to develop and sub-divide the said land into smaller plots in order to sell them to the various buyers. It was submitted that after the conversion, the land held as stock-in-trade was leveled and sub-divided by the assessee in the smaller plots, some fit for residential purposes and some fit for constructing commercial shops. It was submitted that the assessee also paid necessary plotting charges and arranged for security services. It was submitted that the assessee started selling the said plots from the year 2000-01 which continued over a period of eight years. It was contended that the activity of plotting and selling the plots of land was real, substantial, systematic and organized activity of the assessee and the income arising out of such activity was business income as declared in the return of income. It was submitted that the land held as stock-in-trade and sold in the year under consideration for Rs. 86,08,000/- was for 54,132 sq.ft and after reducing the cost of the said area at the value on the date of conversion, the assessee had suffered loss of Rs. 1,44,42,930/-.
4. The contention of the assessee that the activity of selling of plots is a business activity was not accepted by the A.O. on the following grounds:-
"There is no evidence on record brought by the assessee that the said land inherited by means of will is converted into stock in trade. Assessee has never informed the department in this regard on occasion of such conversion. No returns were filed in the assessment year in which such conversion took place.
ii) There is no evidence on record for expenses toward leveling of the land, subdivision into smaller plots.
iii) Assessee claims that it is being developed into a small township. It requires several permission from district administration. Permission toward converting the land from agriculture to residential or commercial purposes, permission to laying of the roads, creating infrastructure in the form of sewage, providing electricity and every other requirement for converting the land into a township, district administration permission is necessary. Assessee failed to provide any of such evidences to claim that the said land was converted into stock in trade. So the claim of the assessee that the income was arising out of a real, substantial, systematic and organized activity is wrong and a futile ploy to avoid the taxation on the said land under the head capital gain.
iv) On perusal of the probate it is found that there is no value mentioned for the said land at Bikaner. From the details filed it is seen that the assessee has valued the stock of land as on 01.04.1981 at Bikaner at Rs. 1,67,83,000/- for both property situated at Rani Bazar and Gajner Road. It is shown to be valued at Rs. 90 per sq. ft. for Rani Bazar land and Rs. 20 per sq ft. for Gajner Road land. The value of the same land is taken as Rs. 5,28,35,145/- as the opening stock in the P&L A/c of the relevant assessment year. Assessee was also asked to explain the valuation of the land at this amount taken as opening stock. Assessee failed to bring any substantial evidence on record to support such valuation of the land. On this account also the claim of the assessee taking the land as stock in trade is not accepted and the said land is considered investment in the hand of the assessee."
For the reasons above, the A.O. did not accept the claim of the assessee of conversion of land into stock-in-trade and treating the same as capital asset of the assessee, he held that the profit arising from sale of land during the year under consideration was chargeable to tax in the hands of the assessee as capital gain. Accordingly, the stamp duty value of the land sold amounting to Rs. 2,03,97,590/- was taken by him as the sale consideration as per section 50-C of the Act and after reducing the indexed cost of acquisition of the land sold worked out by him at Rs. 89,25,124/- , long term capital gain of Rs. 1,14,72,466/- was brought to tax by him in the hands of the assessee. The said indexed cost of acquisition was worked out by the A.O. by taking the fair market value of the land as on 1-4-1981 at Rs. 90/- per sq.ft and indexation was allowed taking the base year 1993-94 wherein the assessee had become the owner of the land.
5. Against the order of the A.O. passed u/s 143(3) r.w.s. 147 of the Act assessing the long term capital gain at Rs. 1,14,72,466/-, appeal was preferred by the assessee before the ld. CIT(A). During the course of appellate proceedings, it was submitted before the ld. CIT(A) that the assessee, apart from the business of consultancy, was also engaged in the business of dealer in plots of land for the last several years. It was submitted that the assessee received two ancestral lands at Bikaner from his parents in the year 1992 which were converted into stock-in-trade in the year 1999 with an intention to develop the same and sub-divide the same into smaller plots in order to sell the same to various buyers. The nature of activity carried out in this regard as explained before the A.O. was also reiterated by the assessee before the ld. CIT(A). Written submission was also filed by the assessee before the ld. CIT(A) offering his explanation in respect of each and every reason given by the A.O. while rejecting the claim of the assessee that his activity of plotting and selling of land was business activity. Copy of plan submitted to the A.O. was also filed by the assessee before the ld. CIT(A) showing layout of plots, their respective plot No., parking area, road etc. It was brought to the notice of the ld. CIT(A) that the total land was sub-divided into 140 plots of different sizes and the same were sold to different buyers on different dates in series of transactions over long period of time which by itself was sufficient to show that the activity of plotting and selling of plot was carried out by the assessee as an organized business activity. The details of expenses incurred right from the year 1991 were also furnished by the assessee before the ld. CIT(A) to show the expenses incurred by him for leveling the land, sub-division and other incidental activity. Without prejudice to this plea, the assessee also pointed out certain mistakes in the long term capital gain computed by the A.O. on sale of plots of land during the year under consideration. It was pointed out in this regard that the fair market value of land as on 1-4-1991 was increased to Rs. 121/- per sq.ft. as against Rs. 90/- per sq.ft. due to area kept aside for road etc. It was also pointed out that the indexation was allowed by the A.O. from the year 1993-94 as against 1981-82 since the land was inherited by the assessee from his ancestors who were the owner of the land even before 1-4-1981.
6. The ld. CIT(A) found merit in the contention of the assessee that he was engaged in the business of sale/purchase of plots of land and held for the following reasons given in para No. 4.3(a) and 4.3(b) that the income arising from the sale activity was chargeable to tax as business income:-
"4.3(a) I have considered the facts of the case. The appellant became owner of land in 1993 on account of inheritance. The appellant has claimed that the land was held as investment till 1999 and in the year 1999, the same was converted into stock and thereafter business of sale of plots of land was started. The appellant claimed the profit/loss on sale of plots as business loss. However, the A.O did not accept appellant's stand that he was engaged in business activity of safe of plots of land on the ground that there was no evidence that land was converted into stock-in-trade and this fact was never informed by the appellant to the department and there was no record of leveling/plotting expenses. The A.O also held that since permission of municipality vas not obtained for establishing the township and moreover under the probate the value was not mentioned, therefore, the appellant held the land as capital asset and therefore, the resultant income was capital gain and not business income. I have considered carefully all the facts and circumstances of the case. I am not inclined to agree with the A.O. On the basis of careful analysis of the facts, I am of the opinion that the appellant was engaged in the business of sale of plots of land. There was no dispute the appellant inherited the property/land in 1993. The appellant claimed that h decided to develop the property and therefore, converted the land in stock-in-trade in the year 1993. The A.O has stated that there was no evidence that land was converted into stock-in-trade in 1999. However, the A.O himself also failed to mention any evidence/material to disprove appellant's clam. But in any case in absence of any evidence/material to disprove appellant's claim, the claim of the appellant has to be accepted that he converted land into stock-in-trade. The A.O has also stated that this fact of conversion of investment into stock-in-trade was not informed by the appellant to the department. The appellant has correctly claimed that there was no requirement under the law to inform the same to the department. The same would have been informed to the department by filing return of income of earlier years. But since the income of those earlier years was not taxable, therefore, returns were not filed. The appellant has stated that the land was divided into various plots i.e more than 140 plots of various sizes which includes residential and commercial plots and for which necessary plotting charges, leveling charges, security charges were incurred and the details of which were submitted during assessment proceedings. The most important fact in favour of appellant's claim is that he started selling the plots from 31.3.2001 and continued the same for a period of 8 years. The appellant also claimed that even stock of plots was still available with him. This continuous and regular activity of selling the plots over a period of number of years shows that appellant's intention was to indulge in business and not to earn capital gain. Whether a person carries on business in a particular commodity can be inferred from the volume, frequency, continuity and regularity of the transactions and the motive involved. 'Business' means an activity carried out continuously and systematically by a person by application of labour or skill with a view to earning income are generally regarded as business. The expression "in the nature of trade" goes to treat the existence of certain element of adventure which ii law would investigate that the character of trade or business. A solitary or isolated transaction if it bears some of the element of business would be termed as adventure in the nature of trade. All those ingredients were present in the case of appellant. Though a solitary or isolate transaction can also be considered as business activity, however, in the case of appellant, it was a continuous, systematic and regular activity spreading over a number of years. Thus, all the ingredients of business activity were present in appellant's case.
4.3(b) In the case of appellant the A.O issued notice u/s 148 on 29.2.2008, on the basis of information received from ITO, Bikaner. However, in the assessment order, the A.O has also mentioned that the appellant filed returns of income for the first time for A.Ys. 2004-05, 2005-06 and 2006-07 as a new case on 31.7.2006. The A.O by his own admission has stated that returns for these years were filed prior to the initiation of proceedings u/s. 148 of the Act. The appellant has claimed that in returns of these (filed before issue of notice u/s. 148) the land was very well shown as stock-in-trade. The appellant has also filed copies of returns of income for these years and P&L account and balance sheet etc in support of his claim. Thus, in the facts and circumstances, it cannot be concluded that the appellant had taken the stand of conversion of land into stock-in-trade after issue of notice u/s. 148 of the Act. The appellant's action/claim cannot be considered as an after thought. The appellant has also stated that for developing a small township, various permissions of municipal authorities were not required being Bikaner a small place. However, whatever permission required were obtained later and a plan/map of the township was also submitted to the Municipality/Town planner. During assessment proceedings as well as during appellate proceedings, the appellant has also filed a copy of plan submitted to the concerned authorities of Municipality of Bikaner/Town planner Bikaner. In the map, the land has been shown as divided into various plots of various sizes. The copy of this plan/map bears the date of 27.6.2005 and also bears the signature of Assistant Town Planner/Deputy Town Planner and Sr. Town Planner, Bikaner. This also proved that the appellant really intended to indulge in the business of selling of plot of lands and the map of Area submitted to municipal authorities was much prior to the initiation of proceedings u/s. 148 of the Act."
7. Keeping in view of the decision rendered by him accepting the basic stand of the assessee that the income arising from the activity of sale of plot of land was business income, the ld. CIT(A) did not consider it necessary to look into the alternative contention raised by the assessee pointing out the mistakes made in the computation of long term capital gain by the A.O. treating the land of the assessee as capital asset.
8. The ld. D.R., submitted that the claim of the assessee of conversion of land held as capital asset into stock-in-trade as well as the business of sale of plots carried on by him was not accepted by the A.O. for the specific reasons given in the assessment order. He read out the said reasons given by the A.O. and strongly relied on them in support of the Revenue's case on the issue under consideration. He contended that these specific reasons given by the A.O., however, are not appreciated by the ld. CIT(A) in the right perspective while accepting the claim of he assessee of conversion of land held as capital asset into stock-in-trade and the profit arising from the sale of land as business income. He also contended that the burden in this regard was on the assessee to establish his business activity on evidence and since the assessee has failed to discharge this burden, the profit arising from the sale of land is liable to be charged in his hands as capital gain as rightly held by the A.O.
9. The ld. counsel for the assessee, on the other hand, reiterated before us the submissions made before the authorities below in support of the assessee's case that the activity of the assessee of plotting and selling of land, going by its nature, is a business activity. He submitted that this claim of the assessee was duly supported by the expenditure incurred over the years for leveling of land, sub-dividing the same in to small plots of land etc. and even the documentary evidence in the form of plan giving layout of the plots of land was also filed by the assessee before the authorities below. He submitted that the land was converted by the assessee in to stock-in-trade in the year 1999 itself and since there was no capital gain arising on such conversion, no return of income was filed by the assessee for the relevant year. He submitted that the sale of plot of land took place for the first time in the A.Y. 2002-03 and since there was loss from such sale, no return was filed by the assessee. He submitted that the nature of business was duly established by the assessee on evidence before the ld. CIT(A) and after examining such evidence, the claim of the assessee in respect of business activity of sale of plot of land carried on by him was accepted by the ld. CIT(A). He read out the relevant observations recorded by the ld. CIT(A) in this regard in para 4.3(a) & 4.3(b) of the impugned order and strongly relied on the same. He also relied on the decision of Hon'ble Supreme Court in the case of Raja J. Rameshwar Rao vs. CIT (1961) XL II ITR 179, Hon'ble Karnataka High Court in the case of CIT vs. R. Ramaiah and Others (1984) 146 ITR 39 and Delhi Bench of ITAT in the case of ITO vs. Ajit Vikram Singh reported in 24 ITD 365 wherein it was held that conversion of land into small plot and sale thereof over a period constitutes business activity.
10. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the two bigger plots of land inherited by the assessee in the year 1993 were claimed to be converted by him into stock-in-trade in the 1999 with the intention to sub-divide the same into small plots of land of different sizes and sell the same to various buyers. This claim of the assessee was duly supported by expenditure incurred over a period on leveling of the land, plotting etc. and even the plan showing the layout of different sizes of small plots including the provision made for road, parking space etc. was filed by the assessee before the authorities below. All the plots of land were sold by the assessee over a period starting from A.Y. 2002-03 to various buyers and as per the details furnished by the ld. counsel for the assessee, 62,49 and 37 were sold by the assessee to different parties in assessment years 2003-04, 2005-06 and 2007-08 respectively. It is no doubt true that there was no contemptuous evidence to show the conversion of plot of land held by the assessee as capital asset into stock-in-trade in the year 1999 especially in the absence of return of income filed for the relevant year. However, the subsequent activity undertaken by the assessee which is duly supported by the relevant documentary evidence in the form of expenditure incurred for leveling, plotting etc., the layout plan showing the division of land into small plots after providing road, parking space etc. and sale of such small plots of land by the assessee over a period of years, in our opinion, is sufficient to show that the land held as capital asset was converted by the assessee in the year 1999 into stock-in-trade with an intention to develop the said land, convert into small plot of land and sale thereof to the various buyers is an organized and systematic activity. Going by this intention, we agree with the ld. CIT(A) that the land held as capital asset was converted by the assessee into stock-in-trade in the year 1999 of the business of plotting and selling the land and the profit arising from sale of land therefore was chargeable to tax as his business income. For this conclusion, we derive support from the decision of Hon'ble Supreme Court in the case of Raja J. Rameshwar Rao (supra) wherein it was held that when a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit and the activity can only be described as a business venture. It was also held that where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit as he bought it but in parts, he is dealing with land as his stock-in-trade. Accordingly, we uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of long term capital gain and dismiss the appeal filed by the Revenue.
11. Now, we shall take up the appeal of the Revenue for A.Y. 2006-07 being ITA No. 4655/Mum/2009 which is directed against the order of ld. CIT(A) XIII, Mumbai dated 16-6-2009.
12. As agreed by the ld. representatives of both the sides, the solitary issue involved in this appeal relating to addition of Rs. 1,14,72,446/- made by the A.O. on account of capital gain and deleted by the ld. CIT(A) is similar to the one involved in the appeal of the Revenue for A.Y. 2003-04 which has already been decided by us in the foregoing portion of this order. As all the material facts relevant to this issue as well as the arguments put forth by both the sides are similar to A.Y. 2003-04, we follow our decision rendered in A.Y. 2003-04 on the similar issue and uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of capital gain. The appeal filed by the Revenue is accordingly dismissed.
13. Now, we shall take up the appeal of the Revenue for A.Y. 2007-08 being ITA No. 7790/Mum2010 which is directed against the order of ld. CIT(A) -24, Mumbai dated 10-8-2010.
14. As regards the main issue involved in this appeal raised in ground No. 1 relating to addition of Rs. 53,87,420/- made by the A.O. on account of capital gain and deleted by the ld. CIT(A), the ld. representatives of both the sides have agreed that the same is similar to the one involved in the appeal of the Revenue for A.Y. 2003-04 which has already been decided by us in the foregoing portion of this order. As all the material facts relevant to this issue as well as the arguments put forth by both the sides are similar to A.Y. 2003- 04, we follow our decision rendered in A.Y. 2003-04 on the similar issue and uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of capital gain. Ground No. 1 raised by the Revenue is accordingly dismissed.
15. As regards ground No. 2, it is observed that the issue involved therein relating to assessee's claim for deduction on account of security charges of Rs. 1,03,000/- as business expenditure is consequential to the main issue raised in ground No. 1. As the main issue involved in ground No. 1 has already been decided by us in favour of the assessee holding that the income from the activity of plotting and selling of plots of land constituted business income of the assessee and not capital gain, the security charges of Rs. 1,03,000/- paid by the assessee is liable to be allowed as deduction as the expenditure incurred wholly and exclusively for the purpose of said business. Accordingly, we uphold the impugned order of the ld. CIT(A) allowing the said deduction and dismiss ground No. 2 of Revenue's appeal.
16. In the result, all appeals of the Revenue are dismissed.