Commissioner Of Income Tax, Patiala v. Raja Malwinder Singh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Date of Decision: April 28, 2010 1.I.T.A. No. 712 of 2009 (O&M) Commissioner of Income Tax, Patiala ..Appellant Versus Raja Malwinder Singh ...Respondent 2.I.T.A. No. 713 of 2009 (O&M) Commissioner of Income Tax, Patiala ..Appellant Versus Raja Malwinder Singh ...Respondent CORAM:HON'BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE JITENDRA CHAUHAN Present:Ms. Urvashi Dhugga, Advocate, for the revenue-appellant. 1.To be referred to the Reporters or not?Yes2.Whether the judgment should be reported inYesthe Digest? M.M. KUMAR, J. This order shall dispose of ITA Nos. 712 and 713 of 2009 filed bythe revenue under Section 260-A of the Income-tax Act, 1961 (for brevity, ‘theAct’), challenging common order dated 21.5.2009, passed by the Income TaxAppellate Tribunal, Chandigarh Bench ‘B’, Chandigarh (for brevity, ‘theTribunal’), in cross appeals bearing ITA No. 838/CHANDI/2008 and ITA No. 1007/CHANDI/2008, in respect of Assessment Year 2005-06. The question of law in both the cases revolves around the taxabilityof the income declared by the assessee-respondent on the sale of ancestralproperty, known as ‘Leela Bhawan’, situated at Patiala. The assessee-respondent had declared long term capital gain of Rs. 4,15,47,048/- and on thatbasis claimed deduction amounting to Rs. 2,42,61,810/- and 1,31,15,147/- underSections 54EC and 54F respectively of the Act. Accordingly, a net taxable longterm capital gain was declared for an amount of Rs. 21,17,913/- after setting offthe brought forward long term capital loss for the assessment year 2004-05. The question is whether the activity of sale of land is a tradingactivity or it is long term capital gain. The Assessing Officer held that it is inthe nature of trade. The aforesaid view was affirmed by the CIT(A). However,the CIT(A) had reduced the long term capital gain to Rs. 4,90,80,711/- bydetermining the fair market value under Section 45(2) of the Act by fixing therate at Rs. 8,710/- per square yard as against Rs. 15,000/- per square yard, asapplied by the Assessing Officer. He further allowed the benefit of exemptionamounting to Rs. 2,42,61,810/- and Rs. 1,39,17,964/- under Sections 54EC and54F of the Act respectively and determined the net taxable long term capitalgain at Rs. 88,48,758/- after granting the benefit of brought forward long termcapital loss of Rs. 20,52,178/-. As far as business profit is concerned, headopted the sale consideration at Rs. 9,65,49,135/- and determined the businessincome at Rs. 3,27,59,621/-. Feeling aggrieved both the assessee-respondent and the revenue-appellant filed appeal before the Tribunal and the Tribunal found that the issuewas whether the sale of land by the assessee-respondent in the instantassessment year constitute as adventure in the nature of ‘trade or sale of capitalasset’. The Tribunal applied the principles laid down by Hon’ble the Supreme Court in the case of G. Venkataswami Naiduv. CIT, 35 ITR 594 (SC),wherein it has been held that no single factor can be evolved to govern thedecision of cases in which the character of the transaction is underconsideration. The Tribunal also placed reliance on another judgment ofHon’ble the Supreme Court in the case ofRaja Bahadur Kamakhaya Narain Singhv. CIT, 77 ITR 253 and also considered the view of this Court in thecase ofCITv. Paragaon Utility Finances (P) Ltd., 152 ITR 7 (P&H). On the question whether the assessee-respondent has converted hiscapital asset in stock –in- trade, the Tribunal in para 10 has held as under:- “10.In the instant case, the residential house owned and sold by Court in the case of G. Venkataswami Naiduv. CIT, 35 ITR 594 (SC),wherein it has been held that no single factor can be evolved to govern thedecision of cases in which the character of the transaction is underconsideration. The Tribunal also placed reliance on another judgment ofHon’ble the Supreme Court in the case ofRaja Bahadur Kamakhaya Narain Singhv. CIT, 77 ITR 253 and also considered the view of this Court in thecase ofCITv. Paragaon Utility Finances (P) Ltd., 152 ITR 7 (P&H). On the question whether the assessee-respondent has converted hiscapital asset in stock –in- trade, the Tribunal in para 10 has held as under:- “10.In the instant case, the residential house owned and sold by the assessee was a historical building in Patiala known as ‘LeelaBhawan’. This building was constructed by grand father of theassessee, Late Maharaja Bhupinder Singh in 1925 and gifted to theassessee by his late father Maharaja Yadvindra Singh vide Deed ofgift dated 10.08.1961. A part of the building was sold inassessment years 1977-78 to 1979-80 which was accepted by theRevenue as sale of a Capital asset, though no Capital gain wasfinally levied as it was found that actual cost of acquisition of theproperty was not capable of computation as held by the Tribunal inan order dated 19.12.1994 in ITA 501/Chandi/1990 and ITA404/Chandi/92. Thereafter, as a result of the aforesaid sale multi-storeyed buildings had come up in the area and in fact videnotification No. 4/16/97-6LG1/2187 dated 17.02.1999, the area inwhich the building was located was declared commercial. It is inthe above circumstances that the assessee has claimed that hedecided to sell the property in question and build a new house forhimself. In order to do so, he obtained the approval for commercial use of the property and authorized one Shri Radhey Shyam for saleof such property. The Assessing Officer has not disputed that theasset so held and sold was ancestral property and was initially aCapital asset. However, in his opinion, since the assesseeconverted his residential property into a commercial propertyleaving 42% of area for roads by hiring the services of a propertydealer, he held that the assessee had converted such capital assetinto Stock-in-trade.” From the aforesaid para the following facts are clear. (a) It has been found thatthe assess-respondent owned a historical building in Patiala known as ‘LeelaBhawan’, which was built by his grand father in 1925. It was gifted to him byhis late father Maharaja Yadvindra Singh, vide Deed of gift dated 10.08.1961.(b)A part of the building was sold during assessment years 1977-78 to 1979-80. The sale of aforesaid building was regarded as ‘sale of a capital asset’ bythe revenue and no capital gain was levied because the actual cost of acquisitionwas not capable of computation. In that regard the Tribunal has cited its earlierorder dated 19.12.1994 passed in ITA 501/Chandi/1990 and ITA No.404/Chandi/92. (c) As a result of the aforesaid sale multi-storeyed buildingshad come up and vide a notification dated 17.2.1999, the area in which thebuilding was located was declared commercial by the Department of LocalGovernment, Punjab. The assessee-respondent decided to sell the property inquestion and build a new house for himself. He obtained the approval forcommercial use of the property and authorized one Shri Radhey Shyam for itssale. (d) The finding recorded by the Assessing Officer was that the asset heldby the assessee-respondent and sold as such was ancestral property and it wasinitially a capital asset. On account of subsequent activities of converting hisresidential property into a commercial property leaving 42% of area for roads by hiring the services of a property dealer, the Assessing Officer held that the‘capital assets’ were converted into ‘Stock-in-trade’. by hiring the services of a property dealer, the Assessing Officer held that the‘capital assets’ were converted into ‘Stock-in-trade’. The Tribunal further held that Section 45(2), which was invoked bythe Assessing Officer, would not apply infact because there was no change of‘capital asset’ into ‘stock-in-trade’. The Tribunal held that in the instant casethere was no such material which may constitute the basis to hold that theassessee-respondent has converted or treated the ‘capital asset’ as ‘stock-in-trade’ attracting the application of Section 45(2) of the Act and that thepresumption of the Assessing Officer could not be ratified that the assessee hadconverted or treated the ‘capital asset’ as ‘stock-in-trade’. The Tribunal furtherfound that the assessee-respondent has maximised his realisation by sale of hisancestral capital asset which has been incorrectly held in the nature of trade bythe Assessing Officer. Moreover, the view of this Court in the case ofKaurSinghv. CIT, (1983) 144 ITR 756(P&H), is absolutely clear where huge landattached to a bungalow was divided into plots for sale. Some of the plots weresold in the relevant assessment year and the revenue has treated the transactionas adventure in the nature of trade. This Court has held that mere fact ofcarving out the plots in a portion of the land, without proof of anything more,could not give rise to the conclusion that it was an adventure in the nature oftrade. Accordingly, the Tribunal has held that the assessee-respondent did notconvert his ‘capital asset’ to ‘stock-in-trade’ in the financial year 2001-02 byobtaining the approval and developing the land by leaving area for roads andsale of different plots. The order of the CIT(A) has been set aside by holdingthat the property in question is capital asset.Feeling aggrieved, the revenue has approached this Court byclaiming that the property has become ‘stock-in-trade’ and would not continueto be the ‘capital asset. We have heard learned counsel for the revenue-appellant at aconsiderable length. On 21.4.2010, when the matter came up for considerationwe had adjourned the hearing to enable the learned counsel to produce any lawshowing that in the facts and circumstances of this case, the property belongingto the assessee-respondent could be assessed as ‘business income’ or it wouldcontinue to enjoy the status of ‘capital asset’ and assessable as ‘long termcapital gain’. Ms. Urvashi Dhugga has not been able to substantiate herargument by citing any view which may be applicable to the facts andcircumstances of the present case. However, she cited the view of a DivisionBench of Allahabad High Court rendered in the case ofI.T.O.v. Rani RatneshKumari, [1980] 123 ITR 343. The aforesaid judgment would not be applicablebecause in that case the assessee had purchased the property and re-sold thesame after developing it. There was finding of fact with regard to financialintention of the assessee who had purchased the land to improve and develop itand then sold. Therefore, we do not feel persuaded by the submission made byMs. Dhugga. The appeals do not merit admission as no question of law, muchless any substantive question of law would arise. The matter, in fact, seems tobe covered against the revenue by the view taken by this Court in Kaur Singh’scase (supra). Accordingly, these appeals fail and the same are dismissed. (M.M. KUMAR)JUDGE April 28, 2010 (JITENDRA CHAUHAN) JUDGE Pkapoor