Commissioner Of Income Tax, Thiruchirapalli v. R.sethuraman

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 05.8.2015 CORAM : THE HONOURABLE MR.JUSTICE V.RAMASUBRAMANIANANDTHE HONOURABLE MR.JUSTICE T.MATHIVANAN T.C.A.Nos.354 to 360 & 417 of 2015 and all connected pending MPs Commissioner of Income Tax,Thiruchirapalli. ... Appellant in all the appealsVs R.Sethuraman ... Respondent in all the appeals Appeals under Section 260A of the Income Tax Act, 1961 againstthe Common order of the Income Tax Appellate Tribunal, Bench 'D',Chennai dated 11.07.2011 and made in I.T.A Nos. 679/Mds/2011 for Assessment year 2000-01680/Mds/2011 for Assessment year 2001-02682/Mds/2011 for Assessment year 2003-04683/Mds/2011 for Assessment year 2004-05 684/Mds/2011 for Assessment year 2005-06596/Mds/2011 for Assessment year 2003-04 597/Mds/2011 for Assessment year 2004-05 and681/Mds/2011 for Assessment year 2002-03 respectively against the Common order of the Commissioner of IncomeTax(Appeals), Tiruchirapalli, dated 11.01.2011 and made inI.T.A.Nos.122, 123, 125/06-07, 87, 88/07-08, 87/07-08 and 124/06-07respectively against the (1) Order of the Deputy Commissioner ofIncome Tax, Company Circle-I, Tiruchirapalli dated 29.03.2006 andmade in PAN/GIR.No. for the Assessment Years 2000-01, 2001-02, 2002-03 and 2003-04 and (2) Order of the Assistant Commissionerof Income Tax, Company Circle-I, Tiruchirapalli dated 31.08.2007 andmade in PAN/GIR.No. for the Assessment Years 2004-05 and2005-06. https://hcservices.ecourts.gov.in/hcservices/ For Appellant : Mr.J.Narayanaswamy Sr. Standing Counsel for I.T.Department COMMON JUDGMENT (Judgment was delivered by V.RAMASUBRAMANIAN,J) The Revenue has come up with the above appeals under Section 260Aof the Income Tax Act, 1961, questioning the correctness of a commonorder passed by the Income Tax Appellate Tribunal in I.T.A.Nos.679 to684 and 596 and 597(Mds)/2011. 2. Heard Mr.J.Narayanaswamy, learned Standing Counsel for theIncome Tax Department. 3. The respondent is the proprietor of a concern by name M/s.WinPharma, which is engaged in the business of manufacturing and sellingpharmaceutical items in a small scale. It appears that the saidconcern M/s.Win Pharma was originally a partnership firm comprisingof the respondent herein as well as two others as its partners.Therefore, when the concern was carrying on business in partnership,it purchased land of an extent of about 1 acre on 14.12.1978. Theland was depicted as the business asset of the partnership firm. 4. It appears that two out of three partners retired on24.6.1979, making the partnership firm a sole proprietary concern, ofwhich, the respondent became the sole proprietor. He continued to runthe business as a proprietorship concern thereafter. 5. On 24.1.1981, the respondent purchased an additional land ofan extent of about 1 acre, which was adjoining the land that wasalready owned. In this process, the respondent became the owner of aland of an extent of about 2 acres. 6. Out of the said land, the respondent sold an extent of about25,000 sq.ft., to Life Insurance Corporation of India in the year1991-92. The remaining portion of the land was sold by the respondentto various persons under several registered sale deeds during theperiod 1999-2000, by way of undivided shares. The purchasers of thoseundivided shares of the remaining extent of land got flatsconstructed for themselves on the remaining extent of the land. 7. The income derived out of this activity was returned by therespondent, as a business income, from the assessment year 2003-2004onwards. But, pursuant to a survey held on 5.2.2004 under Section133A and the information collected therefrom, the Department issued a notice under Section 148 alleging that there was income that hadescaped assessment. 7. The income derived out of this activity was returned by therespondent, as a business income, from the assessment year 2003-2004onwards. But, pursuant to a survey held on 5.2.2004 under Section133A and the information collected therefrom, the Department issued a notice under Section 148 alleging that there was income that hadescaped assessment. 8. Thereafter, an order was passed on 29.3.2006 under Section 143(3), holding that the income derived by the respondent from out ofthe sale of the land in question, could not be treated as a businessincome, as he was engaged only in the business of manufacture andsale of pharmaceutical products and that therefore, the respondentought to have paid capital gains tax. 9. A series of assessment orders was passed on 29.3.2006 for theassessment years 2000-2001 to 2003-2004. Similarly, two orders werepassed on 31.8.2007 in respect of the assessment years 2004-2005 and2005-2006. Aggrieved by these orders, the assessee filed appeals inI.T.A. Nos.122 to 125/2006-2007 and 87 and 88/2007-2008 before theCommissioner of Income Tax (Appeals). The Commissioner allowed theappeals for the assessment years 2000-2001 to 2002-2003 and 2005-2006fully and allowed the appeals in respect of the assessment years2003-2004 and 2004-2005 partly. 10. As against those orders, the Department filed appeals inI.T.A.Nos.679 to 684 of 2011 for the assessment years 2000-2001 to2005-2006 before the Income Tax Appellate Tribunal. The assesseefiled two independent appeals in I.T.A.Nos.596 and 597 of 2011 inrespect of the assessment years 2003-2004 and 2004-2005, as againstthe disallowed portion of his claims. By a common order dated11.7.2011, the Tribunal dismissed the appeals filed by the Revenueand allowed the two appeals filed by the assessee. Hence, the Revenueis on appeal before us. 11. The Revenue has raised the following substantial questions oflaw arising in respect of these appeals : "(i) Assessment Year 2000-2001 to 2005-2006:Whether on the facts and in thecircumstances of the case, the Tribunal was rightin holding that the income from the sale ofundivided share in land and sale of flatsseparately in different years cannot be subjectedto computation of capital gains and said incomeis to be treated as business income ? (ii) Assessment year 2003-2004 :Whether on the facts and in thecircumstances of the case, the Tribunal was rightin holding that the addition of difference incost of construction based on DVO's valuationreport made by the Assessing Officer under Section 69C cannot be sustained ?(iii) Assessment year 2003-2004 and 2004-2005 : (a) Whether on the facts and in thecircumstances of the case, the Tribunal was rightin holding that the assessee is developer ofhousing unit and is entitled for deduction underSection 80IB(10) ? (b) Whether on the facts and in thecircumstances of the case, the Tribunal was rightin holding that the assessee had developed theland to the extent of 1 acre as provided inSection 80IB(10) ? and (c) Whether on the facts and in thecircumstances of the case, the Tribunal was rightin considering the fact that one of the housingunit was above 1,500 sq.ft., violating the limitprescribed under Section 80IB(10)? " 12. The answer to questions (iii)(a) to (iii)(c) in relation toassessment years 2003-2004 and 2004-2005 would depend directly uponour answer to question (i) in relation to the assessment years 2000-2001 to 2005-2006. Therefore, we shall take up for consideration thefirst question that relates to the issue as to whether the sale ofundivided share in land by the assessee could be treated as abusiness income or not. (c) Whether on the facts and in thecircumstances of the case, the Tribunal was rightin considering the fact that one of the housingunit was above 1,500 sq.ft., violating the limitprescribed under Section 80IB(10)? " 12. The answer to questions (iii)(a) to (iii)(c) in relation toassessment years 2003-2004 and 2004-2005 would depend directly uponour answer to question (i) in relation to the assessment years 2000-2001 to 2005-2006. Therefore, we shall take up for consideration thefirst question that relates to the issue as to whether the sale ofundivided share in land by the assessee could be treated as abusiness income or not. 13. The facts, which we have narrated in the first part of thisorder would show that the respondent was originally a partnershipfirm, which purchased a land as part of its business asset. After theretirement of two partners and the firm became a sole proprietaryconcern, the respondent became the sole proprietor and he acquiredthe adjoining land for business purposes. Out of the said land, oneportion had already been sold to the Life Insurance Corporation ofIndia in the year 1991-1992. It appears that the said sale wastreated as part of the business transaction and there was no disputewith regard to the income derived from the sale to the Life InsuranceCorporation of India. 14. However, when the respondent sold the remaining extent ofland by means of registered sale deeds conveying undivided shareswith a view to enable the purchasers to construct flats, theDepartment raised an objection on the ground that the sale ofproperties was not part of the business of the respondent and thattherefore, the income derived therefrom cannot be treated as businessincome. 15. The contention of the Department is primarily fallacious. Therespondent is an individual. Unlike the companies incorporated underthe Companies Act, 1956, whose articles of association contain theobject clauses, an individual need not necessarily confine hisactivity to a particular line of business. It is an admitted factthat the respondent was a partnership firm, which purchased theproperty only as a part of its business assets. Therefore, therecannot be a presumption that the respondent cannot carry on anyactivity other than that of manufacture and sale of pharmaceuticalproducts. Hence, the Commissioner of Income Tax (Appeals) and theTribunal were right in holding that the assessee was entitled totreat it as a business income. Hence, we decide on question (i) thatthe Tribunal was right in holding that the income from the sale ofundivided share of land and the construction of flats cannot besubjected to computation of capital gains and that the same would betreated as business income. As a consequence of this opinion,questions (iii)(a) to (iii)(c) raised in relation to the assessmentyears 2003-2004 and 2004-2005 should automatically go in favour ofthe assessee. 16. Coming to the question of law relating to the valuationreport submitted by the DVO and the reliance placed by the AssessingOfficer under Section 69C in relation to the assessment year 2003-2004, it is seen from paragraphs 23 and 24 of the order of theTribunal that the sale of flats to 82 individual buyers was actuallya composite transaction. For the purpose of convenience, the promoterhad divided the entire consideration into two components, onerepresenting the value of the undivided share of land and the otherrepresenting the cost of construction. Paragraphs 23 and 24 of theorder of the Tribunal in this regard read as follows :"23. The next point to be considered in theappeals filed by the Revenue is the addition ofRs.1,39,08,127/- made by the Assessing Authorityfor the assessment year 2003-2004 under Section69C towards under-statement of cost ofconstruction. The basis of making an independentvaluation of the superstructure itself has beenattempted by the Assessing Authority on thepremise that the project of the assesseeconstituted two transactions, namely the sale ofland and thereafter construction of apartments.Upholding the order of the Commissioner of IncomeTax (Appeals), we have already held that therewas no two different transactions in the sale ofapartments and the assessee had sold theapartments along with the undivided share of right in the land and the project undertaken bythe assessee was a composite project andparticularly a housing project. When it is foundthat there are no two different transactions,there is no basis for making an independentvaluation of the superstructure. 24. Apart from the above basic fallacyrelied on by the Assessing Authority, it is to beseen that the consideration was paid by thebuyers as a whole for the purchase of apartmentsalong with the undivided share of right in theland and as such the value of land and value ofapartment cannot be worked out independently. Thevalue adopted for the purpose of executing saledeeds to convey the undivided share of right inthe land was only for the purpose ofregistration, which is evident from the fact thatthe guideline value was adopted by the assesseeto register such documents. It is to be seentherefore that the consideration paid by thebuyers of the apartments is wholesomeconsideration for a dwelling unit. The AssessingAuthority has no case that the assessee hadreceived any consideration in excess of theconsideration reflected in the registereddocuments and in the books of accounts. No buyerhas ever told the Assessing Officer that he haspaid something more to the assessee than what wasstated in the accounts. Therefore, there cannotbe a case that the assessee had spent somethingmore and realized something more from the buyers.When such a case is not possible, there is nobasis for dissecting the superstructure from thewholesome transaction and attempt to adopt adifferent valuation for the said superstructure.The whole exercise of the Assessing Authority inthis regard is irrational." 17. We do not see anything wrong with the opinion of the Tribunalin this regard. Therefore, the question (ii) relating to theassessment year 2003-2004 is also answered against the Department. 18. In so far as the question as to whether the Tribunal wasright in holding that the assessee had developed the land to theextent of one acre and above to be eligible for the benefit ofSection 80IB(10), the Tribunal has rightly pointed out that it is not 17. We do not see anything wrong with the opinion of the Tribunalin this regard. Therefore, the question (ii) relating to theassessment year 2003-2004 is also answered against the Department. 18. In so far as the question as to whether the Tribunal wasright in holding that the assessee had developed the land to theextent of one acre and above to be eligible for the benefit ofSection 80IB(10), the Tribunal has rightly pointed out that it is not necessary for the developer to convey the entire extent of one acreand above to the purchasers. If a property is lawfully developed by abuyer, one third (1/3) of the total extent of land should necessarilybe reserved for public utility such as roads, etc. It is not possiblefor a developer to convey the entire land in favour of thepurchasers, as he is obliged by the Town and Country Planning Act,1971 and the Development Control Rules to leave spaces earmarked forpublic purposes. Therefore, this question has also been rightlyanswered against the Department by the Tribunal. 19. Accordingly, all the above appeals are dismissed.Consequently, all connected pending MPs are also dismissed. Sd/- Assistant Registrar(CS IV) //True Copy//RS Sub Assistant RegistrarTo1.The Assistant Registrar, Income Tax Appellate Tribunal, D Bench, Chennai.2.The Commissioner of Income Tax(Appeals), 44, Williams Road, Cantonment, Tiruchirapalli - 620 001.3.The Deputy Commissioner of Income Tax, Company Circle - I, Tiruchirapalli.4.The Assistant Commissioner of Income Tax, Company Circle - I, Range - I, Tiruchirapalli.5.The Secretary, Central Board of Direct Taxes, New Delhi.+8cc's to Mr.J.Narayanasamy, S.R.No.40360TCA.Nos.354 to 360 & 417 of 2015all connected pending MPs GR(CO)CA(01/09/2015)