ITAT MUMBAI BENCH 'D'

IT Appeal No. 2694 (Mum.) of 2009
[ASSESSMENT YEAR 2005-06]

D. MANMOHAN, VICE-PRESIDENT
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER

Yogesh A. Thar for the Appellant.
Ashutosh Rajhans for the Respondent.

D. Manmohan, Vice-President - This is an appeal filed at the instance of the assessee company and it pertains to A.Y. 2005-06.

2. Assessee raised four grounds which are taken up in seriatim for the sake of convenience.

3. Vide ground No.1 assessee contends that the AO as well as the CIT(A) erred in treating the transaction of sale of plot of land at CBD Belapur as an adventure in nature of trade overlooking the fact that the transaction gives rise to capital gain tax only since the assessee company was not engaged in the business of purchase and sale of plots. The facts relevant in this context are stated in brief. The assessee company is engaged in the business of manufacture of cotton, manmade yarn, fabrics, etc. In respect of the previous year 2004-05 it declared loss of Rs. 1.23 crores. The return was filed alongwith audit report under section 44AB of the Act. The case having been taken up for scrutiny the AO called upon the assessee to furnish the details of the claim made in the return of income. It may be noticed that the assessee showed income from capital gains. The AO noticed that the assessee company had taken two properties at New Bombay and Dombivali out of which the New Bombay property was sold for a total consideration of Rs. 2,95,55,000/- and the same was offered for taxation under the head "Long Term Capital Gains". This property was in turn purchased from CIDCO for doing business. Assessee company entered into lease agreement to utilise the plot for construction of its new administrative office. As can be seen from page 43 of the paper book, vide letter dated 18.12.1993, CIDCO has given on lease a plot of land at CBD Belapur, New Bombay under Corporate Shifting Scheme in New Bombay. The lease period was 60 years and the land was to be used for construction of corporate office and if the entire area is not needed for the corporate office the assessee company is entitled to sell part of the built-up area to outsiders, subject to certain conditions. As per the terms and conditions the lessee is obliged to submit to the Corporation, for its approval, the plans of the building intended to be erected on the land.

4. The AO observed that the property at New Bombay was taken on lease for development and hence the assessee has to be considered as being engaged in the business of property development. He also observed that the landed property has been purchased by the assessee for the purpose of doing business and hence its sale thereof has to be treated as adventure in the nature of trade. The AO referred to various case law in coming to the conclusion that even a single transaction of purchase and sale would constitute an adventure in the nature of trade, provided the original intention was to utilise it for business purpose. In the instant case the assessee having entered into a tripartite agreement with CIDCO and M/s. Shreya Enterprises whereby the original lease granted by CIDCO to the assessee was transferred to the third party, the income therefrom was sought to be treated as business income by holding that the entire character of the transaction of entering into a lease with CIDCO and transferring the same to a third party by way of a tripartite agreement would amount to adventure in the nature of trade.

5. Aggrieved, assessee contended before the first appellate authority that the assessee company was allotted the plot on lease by CIDCO on 18th December, 1993 under Corporate Shifting Scheme with a specific condition that the plot must be used for construction of office building only and hence at the time of entering into an agreement and taking over possession the intention was to construct corporate office. Therefore it cannot be stated that the assessee company acquired the land for the purpose of resale. In fact the assessee company could not make use of the plot for corporate office and hence it applied to CIDCO, vide letter dated 13.02.2004, to consider the change of user to residential-cum-commercial complex to which the CIDCO granted permission on 15th July, 2004. The permission was accorded subject to the condition that construction should be done within two years and non-compliance of the condition would invite penalty from CIDCO. Having regard to the peculiar nature the assessee had obtained due approval of its Board of Directors in March, 2005 to transfer the plot to the buyer for a consideration of Rs. 2,95,55,000/- and accordingly applied to CIDCO for grant of permission to assign leasehold rights in the plot to the buyer. CIDCO having granted such permission, tripartite agreement dated 24th March, 2005 was entered into and thus the assessee received the impugned consideration. It was therefore contended that the main intention, at the time of entering into a lease with CIDCO in 1993 was to shift its corporate office but due to the change in the scenario it could not carry on construction activity and had to transfer the lease hold rights to a third party. It is thus seen that the assessee did not have even the remotest idea of purchase and sale of plots at the time of entering into agreement with CIDCO in 1993 and hence it cannot be treated as a transaction with an intention to sell the same at a later point of time, in the form of adventure in the nature of trade. Reliance was placed upon several case law in support of its contention that the main activity of the assessee being manufacture of cotton, yarn, etc. transfer of property, which is not related to the existing line of business, cannot be stated to be an adventure in the nature of trade and the intention has to be seen at the time of purchase and not at the time of sale, which had taken place in the circumstances set out herein above.

6. The learned CIT(A) observed that even a single transaction may be treated as adventure in the nature of trade if the intention to sell was for making profit. In his opinion the series of dates occurring between 03.11.1993 and 29.03.2005 shows the intention of the assessee, such as allotment of plot, request for additional plots, request to handover possession, letter to urban development, letter to fulfil certain conditions, submission of undertaking regarding number of employees to be shifted/reduced, execution of the agreement, letter to CIDCO for modifying the conditions on user and sub-lease, letter to develop and sell the plot, letter relating to removal of pipelines, request for possession of the land, tripartite agreement for sale of the plot to M/s. Shreya Enterprises and NOC in the name of the buyer.

7. He further observed that though the assessee company claimed that its intention was to shift its business premises to the new place at Belapur the fact remains that it never shifted and in fact it never took over possession of the such plot and, on the top of it, assessee company applied to CIDCO to get permission to sell the land to third party instead of surrendering such plot of land to CIDCO. Therefore, in the opinion of the learned CIT(A), when the assessee decided not to return the plot of land to CIDCO, the intention of the assessee changes from that of use of the land for its own business to selling the rights to third party, which would reflect that the purpose was to make profit only. He, therefore, concluded that the AO was justified in holding that it was an adventure in the nature of trade and thus the income, on transfer of leasehold rights, is assessable to tax under the head "Profits and Gains of Business".

8. Further aggrieved, assessee company is in appeal before us. The learned counsel for the assessee submitted that the impugned property was allotted by CIDCO under Corporate Shifting Scheme. It was never the intention of the assessee to carry on property development activity. The learned counsel for the assessee has also referred to the 89th Annual Report to submit that the assessee company was mainly engaged in the business of manufacture of cotton and yarn and the company was interested in undertaking substantial modernization and expansion of business. Page 5 of the paper book shows that that main activity of the assessee company was only textile activity and it had no other segment of business operations. The learned counsel also adverted our attention to page 7 of the paper book to submit that the company's main intention was to develop new fabrics with variety of fibres and all other activities related thereto but it never had any future plan to develop any piece of land or to engage itself in purchase and sale of properties. He also referred to page 14 of the paper book to highlight that the profitability of the company was only dependent upon better operational efficiency of the units consisting of production of textile fabrics and there was no idea of entering into any new line of activity. Page 34 shows that the company was interested in developing its mill property and construction of new administrative office at Dadar. The learned counsel also referred to the letter dated 18.12.1993 addressed by CIDCO to assessee company to highlight that the plot at CBD Belapur was allotted under the new Corporate Shifting Scheme with a specific purpose, i.e. for construction of corporate office and if the assessee is not able to use the entire area constructed there is a clause permitting it to sell 25% of the FSI at a specified rate. It was also specified in the agreement that the allotment of land shall be made only for permissible user of the said property on the line of standard format of agreement of lease; only when the construction is completed, a lease deed will be executed and possession of land will be handed over to the allottees only after payment of full lease premium. He also referred to the tripartite agreement (page 62 onwards of the paper book) to submit that the assessee at no stage intended to engage in the activity of purchase and sale of land since its main focus was to engage itself in the business of manufacture of cotton and yarn. Since the assessee was not in a position to make use of the lease hold plot under Corporate Shifting Scheme, it had taken benefit of the lease hold rights by entering into tripartite agreement whereby the assessee company received some money for transferring the lease hold rights to a third party. Merely because it has received some money on such transfer it cannot be treated as an adventure in the nature of trade. The learned counsel relied upon the following decisions in support of his contention that the intention at the time of purchase has to be taken as the basis to consider as to whether the transfer of lease hold rights was an activity in the nature of trade or not: -

The learned counsel for the assessee also submitted that the decisions relied upon by the AO as well as the CIT(A) are distinguishable on facts.

9. On the other hand, the learned D.R. strongly relied upon the orders passed by the tax authorities. The case of the learned D.R. is that from the moment the intention of the assessee changed, i.e. from the right to construct the administrative office to sell the rights in the said plot of land to a third party, the intention changes to that of taking the plot on lease for making profit, which amounts to adventure in the nature of trade.

10. We have carefully considered the rival submissions and perused the record. We have also carefully gone through the case law relied upon by the learned counsel for the assessee as well as the case law relied upon by the AO. At the time of entering into lease agreement with CIDCO in 1993 it cannot be said that there was an intention to carry on business of development of plot. In fact, the terms of the lease agreement clearly suggest that the assessee was to utilise the plot for construction of its new administrative office which, in turn, was meant to be utilised in the main business of the assessee, i.e. manufacture of cotton and yarn/fabrics. As could be seen from the 89th Annual Report of the assessee as well as the other circumstances, the main business of the assessee was only of manufacture of textiles and the assessee company never had even the remotest plan to engage itself in the business of development of plots. In other words, the assessee was not engaged in the business of purchase and sale of plots. According to the AO the transaction in the instant case falls within the extended definition of business, used in section 2(13) of the Income Tax Act, wherein the Act provides that the expression "Business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. In short the case of the AO is that entering into a tripartite agreement for transfer of lease hold rights to M/s. Shreya Enterprises would amount to an adventure in the nature of trade. The expression "adventure in the nature of trade" has come up for consideration before the Apex Court in the case of G. Venkataswami Naidu & Co. (supra) wherein their Lordships elaborately considered the judicial precedents to set out the principles which are necessary to appreciate as to at what stage a transaction would amount to an adventure in the nature of trade eventhough the assessee, in the normal course, is not engaged in such business. The court observed that it is impossible to evolve any formula which can be applied in determining the character of a transaction and in fact no such effort should be made to consider the issue in the backdrop of such formula. In this context the court noticed that no doubt an isolated transaction can also satisfy the description of an adventure as a transaction in the nature of trade but there is an equally well known adage that one swallow does not make a summer. Thus the court observed that ordinarily an isolated transaction cannot be the sole criterion to test as to whether it is in the nature of trade or sale of investment but it has to be tested by taking a holistic view of the matter in the backdrop of the facts and circumstances of the case. The court also observed that if a person invests money in land, intending to hold it, and thereafter sells it at a profit, it would be a clear case of capital purchase and not profit derived from an adventure in the nature of trade. In other words, the cases of realisation of investments concerning of purchase and resale, though profitable, are clearly outside the domain of adventure in the nature of trade. At the same time in deciding the nature of such transactions several factors are to be taken into consideration. The dominant factors are: (a) was the purchaser a trader or whether the purchase of the commodity (in the instant case entering into lease agreement) and its resale (transferring the lease hold rights to a third party through a tripartite agreement) allied to his usual trade or business or incidental to it; (b) nature of the commodity and quantity purchased and sold and whether such commodity is subject matter of trade of the assessee; (c) whether the purchaser (in the instant case the assessee in its capacity as lessee) by any act subsequent to the purchase improved the quality of the commodity purchased and thereby made it more readily resalable and whether they are similar to the operations usually associated with trade; and (d) whether such transactions are repeated. The court further observed that there may be other circumstances that need to be taken into consideration depending on the facts of each case but essentially the issue as to whether it is an investment or an adventure in the nature of trade is a mixed question of fact and law which has to be decided by taking into consideration the initial intention at the time of purchase and the subsequent events which compelled the assessee to sell the same.

11. In the instant case the plot of land was allotted by CIDCO under Corporate Shifting Scheme when the assessee's only intention was to continue its main line of activity, i.e. manufacture of cotton and yarn. It was never the intention of the assessee to carry on property development activity at that stage. In fact, the agreement entered into with CIDCO is subject to several restrictions, i.e. the assessee cannot make use of the property other than for construction of corporate office. However, by any chance if the entire area constructed is not needed by the assessee, the assessee is entitled to sell only 25% of the FSI at a stipulated price. Here also the assessee is not given unfettered right to sell the built up area in the manner it likes. The lessee is not allowed to transfer or assign its rights to any other person. The assessee is duty bound to submit to the CIDCO the plan of the building intended to be erected on the land within six months from the date of agreement of lease failing which the lease amount deposited stands forfeited. Clause 3 of the agreement shows that the lessee has to complete erection of the building within four years from the date of the agreement, with a specific stipulation that time is essence of the contract and any delay would give the Corporation a right to terminate the agreement or to revoke the agreement. The land allotted is subject to the condition that it would be utilised for permissible purposes only. Though the agreement was entered into in 1993 the assessee could not make use of the plot of land for its main business activity. The assessee made its best efforts from time to time to take possession of the plot of land as could be noticed from the letters addressed to CIDCO. Even on 23.12.2003 the assessee agreed to pay a sum of Rs. 10,000/- per annum to keep the plot free from encroachment. In response to the application by the assessee company CIDCO granted permission for change of user from commercial to residential-cum-commercial subject to certain terms. Since the assessee could not make use of the property for its business purpose, by way of a tripartite agreement the property was assigned to M/s. Shreya Enterprises, wherein it was made clear that though the assessee was in occupation and possession of the land and was entitled to carry out construction of building as per the plan it could not carry out the same and hence by mutual negotiations the assessee (seller) agreed to transfer and assign the rights in favour of M/s. Shreya Enterprises (Assignee). For the first time the rights have been assigned to a third party by the said agreement of lease. In other words, it was not a sale or transfer of property by the assessee for a profit but since the assessee could not make use of the rights assigned to it, through CIDCO it was transferred to a third party to whom CIDCO assigned the lease hold rights. It is, therefore, a case where the assessee could not make best use of the lease hold rights. Hence, through the mode of tripartite agreement the same was assigned to M/s. Shreya Enterprises for a consideration which cannot be, in the circumstances of the case, considered as an adventure in the nature of trade. In our considered opinion the amount received pursuant to the tripartite agreement is assessable to tax under the head "Capital Gains" only. It is not the case of the Revenue that the assessee was engaged in such activity in respect of any other piece of land or property. In other words, this is the only isolated transaction of its kind. Since the initial intention was not to carry on business of development of plots and even thereafter the assessee had never intended to carry on the business of development of plots it requested the CIDCO to change the right of user of plot from commercial purpose to residential-cum-commercial purpose only with a view to utilise the property. Since the assessee could not successfully utilise the said plot of land it had to take a decision of assigning the rights to a third party by way of a tripartite agreement.

12. The AO in para 4 of his order observed that the assessee was engaged in the business of property development whereas the material facts furnished before us clearly indicate that the assessee never intended to carry on any other business, other than manufacturing of cotton, yarn, etc. Therefore, in our considered opinion the AO has committed an error in recording a finding that the assessee is engaged in the business of property development.

13. The learned CIT(A) also recorded a finding that there was a request for additional plots for development activity whereas the plea of the assessee was that there is no such request; on the contrary the assessee having not been able to utilise the plot of land, there were several reminders from CIDCO to handover the possession of the above plot allotted to the assessee and at that stage the assessee company replied that it was prepared for construction of the office building on the said plot but it could not get approval of the final plan prepared unless the plot is given. It was stated in its letter dated 07.09.1996 that the assessee company is an industrial concern carrying on textile business and it cannot afford to block its large funds for a vacant plot of land. Thus, not only at the time of entering into an agreement but even subsequent thereto the assessee's interest was only to utilise the property as per the terms of agreement subject to handing over of possession and because of long gap and due to unfavourable circumstances, the assessee had to reassign the rights by way of a tripartite agreement.

14. Under the circumstances it cannot be stated that the assessee company was interested in carrying on activity of business in purchase and sale of property. It cannot even be stated as an isolated transaction of purchase and sale of property with an intention to make profit out of such transaction. As rightly observed by the Apex Court in the case of G. Venkataswami Naidu & Co. (supra) merely because the assessee makes some profit in a particular transaction it cannot be treated as an adventure in the nature of trade so long as the initial intention of a person - investing money - was to hold the property and utilise it for a different purpose. In the peculiar circumstances of the case it can only be said that it is only a case of capital gain and not profit derived from an adventure in the nature of trade. We therefore hold that the assessee is justified in declaring the amount received - from assigning its rights over the plot of land by a tripartite agreement - is assessable to capital gains tax. We direct the AO to compute the income accordingly.

15. Vide ground No. 2 and 3 the contention of the assessee was that the AO was not justified in disallowing the expenditure under section 14A read with Rule 8D of the IT Rules. Assessee invested in shares to the tune of Rs. 4,78,334/-, income from which was claimed as exempt from tax. The case of the AO was that the assessee company cannot earn dividend without incurring expenses thereon. Since the investment decisions are very complex in nature requiring substantial market research, day-to-day analysis of market trends, etc., some expenditure is required to earn dividend income. He, therefore, disallowed 10% of the dividend income as being attributable to earning of exempt income. Aggrieved by the action of the AO the assessee preferred appeal before the first appellate authority wherein it was contended that disallowance of Rs. 54,815/- is excessive. The learned CIT(A) referred to the decision of the ITAT Special Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.) to hold that Rule 8D, which was introduced in the year 2008 is applicable retrospectively to the preceding year and therefore directed the AO to apply Rule 8D for computing disallowance under section 14A.

16. Aggrieved, assessee is in appeal before us. The learned counsel for the assessee submitted that the Hon'ble Bombay High Court has now reversed the decision of the ITAT Special Bench, Mumbai and hence Rule 8D cannot be applied to the assessment year under consideration. He, therefore, submitted that only reasonable expenditure attributable to earning of dividend income should be disallowed. Since the learned CIT(A) applied Rule 8D, we set aside the order of the learned CIT(A) and uphold the order of the AO. In our opinion computation of disallowance under section 14A, as determined by the AO, is reasonable.

17. Vide ground No. 4 levy of interest under sections 234B and 234C of the Act is challenged. At the time of hearing the learned counsel for the assessee admitted that this is purely consequential in nature. AO is directed accordingly.

18. In the result, appeal filed by the assessee company is partly allowed.