Ita/162/2011 Of M/S.e.v.mathai And Sons v. The Commr.of Income Tax,Cochin

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE. P.S.GOPINATHAN SATURDAY, THE 19TH DAY OF NOVEMBER 2011/28TH KARTHIKA 1933 ITA.No. 162 of 2011 ( ) ----------------------- AGAINST ORDER IN ITA.1/2009 DATED 02/05/2011 of I.T.A.TRIBUNAL,COCHINBENCH APPELLANT(S):/ APPELLANT / ASSESSEE ------------ M/S.E.V.MATHAI & SONS, A.M.ROAD, KOTHAMANGALAM. BY ADV. SRI.P.BALAKRISHNAN (E) RESPONDENT(S):/ RESPONDENT/REVENUE -------------- THE COMMR. OF INCOME TAX,COCHIN. R BY MR.MANOJ.P.KUNJACHAN, GOVERNMENT PLEADER THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 19-11-2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.162/2011 APPENDIX // TRUE COPY // jg PA TO JUDGE. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... .................................................................... Dated this the 19[th] day of November, 2011. C.R. J U D G M E N T Ramachandran Nair, J. The appellant is a partnership firm engaged in trading mainly in rubber, and is also engaged in real estate business.In January, 2004, the appellant purchased 436.60 acres ofrubber plantation from another concern for a consideration ofRs.408.07 lakhs. The transaction was partly funded through aloan of Rs.170 lakhs availed by the appellant from a Bank.Soon after purchase of the estate, the appellant started sellingthe land in pieces, and in the course of a little of over oneyear, the appellant sold 401.60 acres of land in pieces to 20persons retaining only 35 acres of land with them. In factwithin two months of the purchase that is in February andMarch, 2004 itself the appellant sold 16.26 acres to 5 personsand 384.72 acres were sold in varying extents to 15 personsduring the financial year 2004-05. The gross profit on sale ofthe estate according to the appellant was Rs.124,57,378/-. In ITA No.162/2011 the return filed for the assessment year 2005-06, theappellant conceded an income of Rs.52,16,147/- towardsprofit on sale of the estate under the head “income from othersources” and remitted tax thereon. However, in a noteattached to the return the appellant claimed that the returningof income and payment of tax is precautionary and is subjectto their claim that the transaction being sale of capital asset inthe form of agricultural land does not attract any tax. Aftersending intimation under Section 143(1)(a) of the Income TaxAct (hereinafter referred to as the Act for short) assessmentwas taken up as a scrutiny assessment under Section 143(3) ofthe Act. The Assessing Officer after hearing the assessee'sobjections overruled the claim of exemption by holding thatthe transaction of purchase of estate and resale of the sameafter plotting it into several pieces within the short duration ofa little over one year is a transaction in the nature of businessor trade and so much so the profit or gain on the same isassessable under Section 28 of the Act. Besides disallowance ITA No.162/2011 of exemption from tax claimed by the assessee, the AssessingOfficer also disallowed deduction claimed towards commissionand brokerage paid for failure to deduct tax at source asprovided under Section 40(a)(ia) of the Act. Apart from theabove, the Assessing Officer also made part disallowance ofdepreciation and expenses claimed on four cars used by thepartners towards expenses and depreciation attributable topersonal use. ITA No.162/2011 of exemption from tax claimed by the assessee, the AssessingOfficer also disallowed deduction claimed towards commissionand brokerage paid for failure to deduct tax at source asprovided under Section 40(a)(ia) of the Act. Apart from theabove, the Assessing Officer also made part disallowance ofdepreciation and expenses claimed on four cars used by thepartners towards expenses and depreciation attributable topersonal use. 2.The assessment was challenged in first appeal bythe assessee. The Commissioner of Income Tax (Appeals)granted quantum relief, but sustained the assessment onprofit on sale of estate as “business income”. Even though theappellate authority took the view that the claim of exemptionthrough a note attached to the return in the form of aclarification sought without filing revised return itself is notmaintainable, still he proceeded to consider assessee's claimof exemption on merit and held that the transaction ofpurchase of extensive plantation and plotting and selling of The assessment was challenged in first appeal by ITA No.162/2011 -4- the same within a short period of time was only a business activity. His finding is that the profit from the transactions isassessable under the head “profits and gains of business orprofession”. Even though assessee filed second appeal beforethe Tribunal, the Tribunal rejected the appeal, against whichthis appeal is filed under Section 260A of the Act. Theassessee has raised the following questions for our decision.:- “1.Whether on the facts and in thecircumstances of the case, the Tribunal iscorrect in law and fact in upholding the order ofthe assessing officer in brining to tax thesurplus on sale of agricultural land to capitalgains, without even evaluating the purposes forwhich the sale was effected, thus notconsidering the relevant materials on record,rendering the finding perverse? 2.Whether on the facts and in thecircumstances of the case, the Tribunal iscorrect in law and fact in confirming theaddition on account of disallowance ofdepreciation and car and jeep running expensesmade on an estimate basis when the vehiclesare not used for any personal purposeswhatsoever? 3.Whether the Tribunal is correct in law andfact in confirming the addition made undersection 40(a)(ia) being commission andbrokerage is arbitrary and unjust especiallywhen the income arising out of the receipt of ITA No.162/2011 the sum is assessable in the hands of therecipients? 3. We have heard Shri.P.Balakrishnan learned counsel appearing for the appellant/assessee and learned SeniorStanding Counsel Shri.P.K.R.Menon appearing for the Revenue. 4.There is no controversy on the factual position in asmuch as the assessee purchased 436.60 acres of rubberplantation in January, 2004 for a total consideration ofRs.4,08,07,224/-, out of which Rs.170 lakhs was raisedthrough Bank loan. In the month following the purchase, theassessee started plotting and selling the estate in pieces andby 31/03/2005 i.e. within 14 months of purchase the assesseesold 401 acres to as many as 20 persons and realisedRs.5,31,73,500/-. The case put forward by the assessee'scounsel is that the land purchased was rubber plantation,which is agricultural land and the activity carried on by theassessee is acquisition of capital asset, and the sale of thesame will not attract tax on the profit because agriculturalland is outside the scope of “capital asset” as defined Section 2 ITA No.162/2011 ITA No.162/2011 (14) of the Act. However, the concurrent finding by the 3authorities including the Tribunal is that the activity carriedout by the assessee was not acquisition and holding ofagricultural land for earning agricultural income. On the otherhand, the assessee was only engaged in the business activityof acquiring extensive plantation, plotting into pieces andselling it to different persons within a short time to makeprofit from the market, where land price was steadilyincreasing. Learned Senior Standing Counsel appearing for theRevenue supported the findings of the lower authorities andcontended that no other inference is possible from the natureof activity of the assessee other than to hold that thetransaction is a trade or business activity that yielded a profitof around 42% on the investment within a short span ofaround one year. Even though the Honorable Supreme Courtin the case of Goetze (India) Ltd.v. CIT, reported in 284 ITR323, held that no claim of exemption can be made by theassessee by filing a letter or note to the return but such claim ITA No.162/2011 should be made by way of filing a return or revised return,which the assessee admittedly has not done, we do not thinkwe should reject assessee's claim on this ground because thelower authorities at least alternatively considered the case onmerit. 5.Learned counsel for the assessee raised thecontention that the land was purchased with an intention ofholding it on long term basis and the assessee was compelledto sell the same because the Bank insisted immediaterepayment of the loan of Rs.170 lakhs availed. Anotherground raised by the assessee's counsel is that the assesseehas earned agricultural income and returned the same for taxunder the State Act during the period the estate was held.However the finding of the Tribunal is that the assessee didnot stop sale of the land in pieces even after getting sufficientamount to repay the Bank loan. Further the assessee has noexplanation as to why short term loan was availed from theBank or even if the Bank wanted early repayment, why another ITA No.162/2011 loan could not have been availed for retaining the estate. Notonly that we do not find any merit in the contention but theclaim lacks any bonafides because when the nature of loanwas not proved before the Tribunal, they rightly assumed fromthe conduct of the parties that the loan availed was a shortterm loan for business purpose. 6.So far as the assessee's claim that the assesseecarried agricultural operations and earned agricultural incomeis concerned, clear finding of the Tribunal is that the incomeearned is a paltry sum of Rs.2.59 lakhs from an extensiveplantation of above 400 acres. Besides this, it is seen that theassessee started selling the estate in pieces immediately onacquisition and within two months of purchase the assesseemade 5 sale transactions to 5 persons. Further in the courseof financial year 2004-05 the assessee sold 384.72 acres toanother 15 persons retaining only 35 acres of land with them.The profit earned in the deal is as much as 42% of theinvestment which only shows that the assessee intended only ITA No.162/2011 6.So far as the assessee's claim that the assesseecarried agricultural operations and earned agricultural incomeis concerned, clear finding of the Tribunal is that the incomeearned is a paltry sum of Rs.2.59 lakhs from an extensiveplantation of above 400 acres. Besides this, it is seen that theassessee started selling the estate in pieces immediately onacquisition and within two months of purchase the assesseemade 5 sale transactions to 5 persons. Further in the courseof financial year 2004-05 the assessee sold 384.72 acres toanother 15 persons retaining only 35 acres of land with them.The profit earned in the deal is as much as 42% of theinvestment which only shows that the assessee intended only ITA No.162/2011 to make profit in the market where land price was steadilyincreasing. Learned Senior Standing Counsel for the Revenuerightly pointed out that the transaction is business in realestate and only people with substantial money power canengage in a deal of this nature. We find that the Tribunal hasmeticulously considered the nature of transaction andconcluded that the acquisition of large plantation and thesystematic sale of the same within a short time is onlyspeculative business in which the assessee got a margin of42% on the investment. Learned Senior Counsel for theRevenue has also relied on the decisions of the Supreme Courtin Raja J.Rameswar Raov. CIT,reported in 42 ITR 179 and inP.M.Mohammed Meerakhanv. CIT,reported in 73 ITR 735,wherein the Supreme Court held that transactions similar towhat the assessee has done are in the nature of business. Thefacts in the 2[nd] decision above referred is exactly similar to thefacts in this case and the only difference is the estatepurchased and sold in the reported decision is tea estate while ITA No.162/2011 the estate in this case is rubber estate. The assessee in thatcase after purchase, sold much of the estate in pieces todifferent persons retaining a small portion. Here also afteracquiring 436.60 acres of rubber plantation in January, 2004,within the course of around one year as much as 401.60 acreswere sold by the assessee retaining only 35 acres with them,which is less than 10% of the land acquired by them. We donot know on what basis the assessee can contend that theassessee's intention was to acquire plantation and earnagricultural income. The nature of activity carried on by theassessee completely belies assessee's claim and in our view allthe lower authorities including the Tribunal rightly held thetransaction as business in real estate. We, therefore, do notfind any merit in the assessee's claim for exemption from taxon the profit derived in the transaction and therefore weanswer the first question against the assessee and in favour ofthe Revenue. 7.The 2[nd] question pertains to disallowance of claim of ITA No.162/2011 depreciation and expenses on motor cars used by the partnersof the firm. The clear finding of the Assessing Officer and theother lower authorities including the Tribunal is that none ofthe partners maintained personal vehicle and so much so partof use of the vehicle necessarily has to be treated as personaluse warranting part disallowance of depreciation andexpenses. Vehicles used are passenger vehicles like MerzedezBenz, Bolero, Scorpio and Siena and the appellant assessee hasno case that the partners were maintaining separate vehiclesfor personal use. In the circumstances, we feel partdisallowance of 20% towards personal expenses is quitejustified. Moreover, we do not find any substantial question oflaw on this issue raised by the assessee. Consequently, weanswer this question against the assessee. 8.The last question is on disallowance of brokerage,commission etc. claimed by the assessee which weredisallowed on account of failure to deduct tax at source onsuch payments as provided under Section 40(a)(ia) of the Act. ITA No.162/2011 -12- 8.The last question is on disallowance of brokerage,commission etc. claimed by the assessee which weredisallowed on account of failure to deduct tax at source onsuch payments as provided under Section 40(a)(ia) of the Act. ITA No.162/2011 -12- Since the lower authorities including the Tribunal only appliedstatutory provision on disallowance for failure to deduct tax atsource, we do not find any ground to interfere with the same.Consequently, this question is also answered against theassessee. In the result, the appeal filed by the assessee isdismissed. (C.N.RAMACHANDRAN NAIR, JUDGE) (P.S.GOPINATHAN, JUDGE) jg