Stock converted to investment to evade tax cannot be considered as valid conversion

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘F’ NEW DELHI)

BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

I.T.A. No.1877/Del/2008

Assessment year: 2005-06

ITO,

Ward-15(3),

New Delhi.

(Appellant)

Vs.

M/s Reema Construction Pvt. Ltd.,

634-Ist Floor, Khari Baoli,

Delhi.

 (Respondent)

Appellant by: Shri D.K. Mishra, CIT-DR

Respondent by: Shri C.S. Aggarwal, Sr. Advocate &

Shri R.P. Mall, Advocate.

ORDER

PER TS KAPOOR, AM:

This is an appeal filed by the revenue against the order of Ld CIT(A) dated 29.2.2008. The grounds raised by the revenue are as under:-

1. In the facts and circumstances of the case, the CIT(A) has erred in holding that the purchase and sale of land made by the assessee is not a business transaction and income arising therefore is not a business income.

2. In the facts and circumstances of the case, the CIT(A) has erred in holding that the entire land sold was an agricultural land especially when it was found that there was an old factory building on a portion of this land.

3. In the facts and circumstances of the case, the CIT(A) has erred in holding that the land in question was shown as stock in trade will not convert the transaction into a business transaction until or unless there is circumstantial evidence to this effect.

4. The appellant craves to be allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal.

2. The brief facts of the case are that the assessee is a private limited company and it has filed return of income on 31.10.2005. The case of the assessee was selected for scrutiny. During assessment proceedings, the Assessing Officer found that assessee had earned a short term capital gain at `.79,19,192/-. The assessee had claimed the capital gain as exempt from tax on the belief that the land in question was agricultural land. The said land was purchased by the assessee company in September, 2002 for an amount of `.40,80,808/-. The Assessing Officer further observed that in the balance sheet for the year ended on 31st March, 2003, the assessee had shown the amount of land as closing stock and at col. 15 of the income tax return as mentioned the nature of business as trading. Similarly, for the assessment year 2004-05, in the return of income, the nature of business was mentioned as trading in properties. However, the amount of land was shifted from closing stock and was shown as fixed asset of the company under the head land & building. The Assessing Officer formed a belief that land was not agricultural land and therefore was not exempt from capital gain tax.

3. The assessee filed a petition u/s 144A of the Act before Addl. CIT, New Delhi for directions to Assessing Officer and Addl. CIT during proceedings asked the assessee regarding evidence of treatment of land in the books of accounts and further its conversion to investment, the assessee in response stated that Board of Directors of the company in the month of April, 2003 had decided to treat the said amount as investment instead of stock. The Addl. CIT noticed that return for assessment year 2004-05 was filed on 7.12.2004 whereas the sale deed of land was executed on 25.1.2005. The Addl. CIT further observed on the basis of report of Patwari that land in fact was not agricultural land because area under cultivation was nil for the period October, 2002 and March, 2003 and for the period October, 2003 & March, 2004 only 23 kilas & 9 marlas were under cultivation out of total land of 61 kanals 12 marlas. The Ld ACIT also observed that assessee vide letter dated 27.12.2007 had admitted that the land was purchased for trading purposes. The Addl. CIT put reliance in the case of Twinstar Holdings Ltd. v. Anand Kedia, Deputy CIT [2003] 260 ITR 6 (Bom) wherein it was held that if stock in trade was converted into investment intentionally to avoid tax, it will be treated as non genuine transaction and such a conversion was not allowed. Accordingly, the Ld CIT(A) passed order u/s 144A and directions were issued to Assessing Officer to assess the income as business income. Accordingly, the Assessing Officer passed order on dated 27.12.2007 treating the above land as non agricultural land and further treated the income as normal business income.

4. Dissatisfied with the order, the assessee filed appeal before Ld CIT(A) and submitted as under:-

a) That the land in question is situated at distance of more than 30 kms from the boundary of Gurgaon Municipal Corporation and thus the land in question does not fall within the jurisdiction of municipal corporation and further the land in question does not fall within 8 kms. Of local municipal limit and also does not fall within the notification made in this behalf.

In support of the above certificate from Tehsildar of the area was filed.

b) That land in question is recorded as an agricultural land in khasra girdawari and is assessed to land revenue. In this respect copy of khasra girdawari was submitted.

c) That from the perusal of the above khasra girdawari , it is apparent that a part of area was used for cultivation and part of area was used as godown and further a part of land was kept as un-used. However, that during the period of possession i.e. September, 2002 to January, 2005 the land in question was under cultivation and under Adhbatai arrangement with Shri Bholu Shah and that Shri Bholu Shah was also examined by the Assessing Officer u/s 131 of the Act.

d) That spot enquiries were also made by the Ld Assessing Officer to ascertain whether the land in question was agricultural land or not and to the best of our knowledge and according to actual position, the land must be held as agricultural land.

e) That the Ld Assessing Officer as well as Ld Addl. CIT has not recorded any finding on the issue.

5. The Ld CIT(A) after examining the submissions of assessee held that land in question was an agricultural land falling beyond the distance of more than 30 kms. from the boundary of Gurgaon

Municipal Corporation.

6. Regarding other issues whether income arising on sale of above agricultural land was a business income or not. The assessee submitted before Ld CIT(A)

a) that the company has not incurred any expenses in the nature of business expenses during the entire period relevant to assessment year 2003-04, 2004-05 & 2005-06.

b) That there is no other transaction of sale and purchase of land during this period.

c) That the cultivation activity undertaken by the company through Shri Bholu Shah under Adhbatai arrangement could not be continued as there was water problem and Shri Bholu Shah could not continue the same because of loss.

d) That the period of holding of said land is about 30 months which proves that assessee company had made an investment with a view to sell it later on.

e) That mere book entries does not establish any fact and it is the surrounding circumstances which proves the actual position on the issue.

Reliance was placed on the following cases-

1. Shiv Shankar Lal. v. Commissioner Of Income Tax. 94 ITR 433.

2. DLF Housing & Construction Pvt. Ltd. v. city 141 ITR 806.

3. Forte Properties Pvbt. Ltd. v. CIT 208 ITR 232.

7. Based upon the submissions of Ld AR, the Ld CIT(A) held that transaction of purchase and sale of land by the company was not a business transaction. Thus, income arising there from is not a business income. The relevant para of Ld CIT(A)’s order was reproduced below:-

“I have gone through the finding recorded by the Assessing Officer and also the submissions made before me by the assessee company. The Assessing Officer has mainly relied on the fact that the land in question was shown as stock in trade in the income tax return for the assessment year 2003-04.

Subsequently the perusal of the IT return for assessment year 2004-05 show that the said stock in trade was converted to investment. According to the Assessing Officer the conversion of the stock in trade into investment was a deliberate attempt to evade the taxes. The submission made by the assessee company show that during the entire period the land was held by the assessee. There is no attempt /no evidence showing that the assessee company intends to carry on the business either as a trader or as a land developer and perusal of the annual accounts or the year ending 31.3.200, 31.3.2004 & also 31.3.2005, show that the assessee company has not incurred any amount for the development of the land in any manner. Further there is a good evidence on record that the cultivation activities was carried on during this period. Both these facts clearly show that the transaction in question cannot be termed as a business transaction. Further more, mere fact that the land in question was shown as stock in trade will not convert the transaction into a business transaction until or unless there is circumstantial evidence to this affect. The same issue has come for consideration before the Hon'ble Delhi High Court in the case of DLF Housing & Constructions Pvt. Ltd. V. CIT Delhi 141 ITR 606. In this case also, the assessee has shown the agricultural farm as stock in trade. However, there was considerable evidence that the company has incurred substantial amount for agricultural farming and agricultural income was also received. These facts cumulatively show that the transaction of purchase and sale of land is not a business transaction as held by the Hon'ble Delhi High Court. I, therefore, following the finding of the Hon'ble Delhi High Court hold that the transaction of purchase and sale of land by the assessee company is not a business transaction and thus income arising there from is not a business income. “

8. Aggrieved, the revenue filed appeal before this Tribunal.

9. At the outset, the Ld DR stated that no expenses were incurred for agricultural operations and no income was shown from agricultural operation. He further argued that land was in fact purchased for carrying out trading activity which was clear from the fact that assessee is a construction company as is apparent from its name itself and also it had classified the amount of purchase of land as stock in trade. Reliance was placed in the case of Hemachand Hirachand Shah v. Commissioner of Income-tax 206 ITR 55. He further argued that assessee had converted the above stock in trade into investment only to evade income tax.

10. The Ld AR, on the other hand, argued that land though originally was shown in the balance sheet as closing stock but company vide its resolution dated April, 2004 had decided to convert the stock into investment. In this respect he took us to page 134 of paper book wherein copy of balance sheet dated 31.3.2004 was placed and in respect of case laws relied upon by the Ld Dr, the Ld AR submitted that in that case there was a series of transactions and secondly there was development of land which is not the case in the present case. He further submitted that the present case is of a one time transaction of purchase and sale after about 30 months from the date of purchase. He further took us to page 17 of paper book where copy of khasra girdawari was placed and wherein as per Ld AR the fact was mentioned that on some occasions land was cultivated and on certain occasions land was not cultivated. He further argued that the fact remains that the land was agricultural land and there is no change in land use. Reliance was placed in the judgment in the case of CIT v. Leelawati 341 ITR 287. He further argued that report of Inspector also shows that the land was partly used for agricultural purposes and took us to page 6 of paper book. He further argued that change of land use was not obtained, therefore, land remained as agricultural land. Therefore, in view of the above, the Ld AR argued that Ld CIT(A) has rightly held the land to be agricultural land and had rightly deleted the addition.

11. In his rejoinder, the Ld Dr argued that there is no bar that agricultural land could not be traded and trading in agricultural land is taxable as business income. He further argued that any income from stock in trade of land is a business income whether agricultural or not. He further argued that the assessee had purchased the land and building and wanted to develop the entire land into plots. In respect of change of land use the Ld DR argued that it depended upon the assessee whether to take change of certificate of land use or not and mere not taking certificate of change of land use was not sufficient to change the character of land which indeed was not agricultural land.

12. We have heard the rival submissions of both the parties and have gone through the material available on record. We have observed that land in question was purchased by the assessee from one M/s Ahinsa Laboratory Ltd. vide sale deed No.5098,5099,5100 & 5101 on 11.9.2002 for a total consideration of `.40,80,808/-. The said land was sold for a total consideration of `.1,20,00,000/- on 25.1.2005 to M/s Vulon Electro Control Ltd. Therefore, one thing is clear from the above facts that the original purchaser, the assessee and the final purchaser were all corporate assessees who generally purchase such small pieces of land for some industrial/development activities. Further, as per report of the Inspector and as per the report of Patwari placed at page 6 & 13 of paper book respectively, it is apparent that there also existed a building on part of land and boundary wall on the entire land. As per report of Inspector, the land was situated on the highway and the said land was barren up to 1 & 1 ½ acres around the semi constructed structure and was barren for the last 10-12 years. The report further stated that there was cultivation of mustered after 1 1½ acres from the structure which fact is corroborated from the khasra giradwari at paper book page 17 which states that as on 25.3.2007 (i.e. after the date of sale of land by assessee) there was cultivation of mustered. From the above facts, it emerges that land indeed was industrial land and a small part of the land was used on some occasions for cultivation as part of the land was also barren. This small cultivation though can be said to be agricultural activity. But the nature of land which in the present case was primarily intended for some industrial activity cannot make it agricultural land. Some times in factories unused land is used for growing some crops. As per khasra & girdawari placed at paper book pages 15, 16 & 17 there was little cultivation between the period 1997 to October, 2006 on a small part of total land and that too in certain years. The Ld CIT(A) has also stated in his order that in some years land was not used for cultivation at all and in some years it was used partly. However, the Ld CIT(A) has completely ignored the fact that there was a factory and boundary wall. During appellate proceedings before us, the Ld AR had referred to report of Patwari placed at page 13 of paper book. On perusal of the report, it is observed that report is of dated 28.12.2007 and which also states that on part of land, there was a building also. The report further state that a part of land is also used for agricultural purposes. However, in view of the fact that this report is dated 28.12.2007 i.e. after the date of sale of land and it does not state the status of land during the period of  possession of land by the assessee i.e. from September, 2002 to January, 2005. Further on page 15 of paper book which is part of khasra & girdawari there is mention of Midway Restaurant on part of the above said land.

13. From the totality of facts noted above, it is apparent that the land in question indeed was meant for some business activity which fact is clear from the fact that purchaser and seller are both companies. Moreover, the assessee had sold the said land & building to M/s Vulan Electro Control Ltd. which is also a business entity. Now, whether the certificate for change of land use was obtained by the original purchaser or not is not clear from the facts of the case. Even if the change of land was not obtained, the fact remains that the land was meant to be used for some industrial activity. The facts of the case relied upon by the Ld AR in the case of CIT v. Leelawati reported in 341 ITR 287 (supra) are distinguishable from the facts of the present case to the extent that in that case, the Hon'ble Karnataka High Court had confirmed the decision of the Hon'ble Tribunal taking the view that the land sold by the assessee retained its agricultural character till date of order permitting non agricultural use was obtained The present case is that of a factory which included land & in no stretch of imagination can be said to be engaged in agricultural activities. Though sale deeds do not mention the fact of structure on the land but revenue records relied upon by the Ld AR clearly mention factory and boundary wall on the said land. The land situated on the highways is purchased only for development and or for some industrial activity and no prudent person would purchase such land for carrying out agricultural activities. Therefore, in view of the above facts and circumstances of the present case, we are of the considered opinion that Assessing Officer had rightly treated the said land as non agricultural land. Hence, we set aside the order of ld CIT(A) and restore the order of Assessing Officer.

14. In view of the above, the appeal filed by the revenue is allowed.

15. Order pronounced in the open court on 7th day of September, 2012.

                                                         Sd/-                Sd/-

                                         (RAJPAL YADAV) (T.S. KAPOOR)

                                   JUDICIAL MEMBER ACCOUNTANT MEMBER

Dt. 07.09.2012.

HMS

Copy forwarded to:-

1. The appellant

2. The respondent

3. The CIT

4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy.

By Order

(ITAT, New Delhi).

Date of hearing 24.7.2012

Date of Dictation 30-31-8.2012

Date of Typing 3.9.2012

Date of order signed by both the Members & pronouncement.7.9.2012

Date of order uploaded on net & sent to the Bench concerned. 7.9.2012