Sale of Plot after dividing it in Parts– Taxable as Capital Gain & Not as Business Income
Recently, ITAT Delhi in Asstt. CIT Vs. Himanshu Garg, ITA No. 819/Del/2020 has held that the land doesn’t become business assets or stock in trade simply because the piece of land has been bifurcated into five different parts to make it saleable after a long period of five years from the date of investment. It per se cannot grant the character of “stock-in-trade” so as to give it a colour of business activity.
In this case, Assessee held the entire piece of land for five long years which established the Intention of the assessee to make investment in the said plot for capital appreciation. Improvement made in the plot of land which was barren and uneven by resorting to land tilling, fencing, etc., was only with a view to make the land saleable and further plotting of the said land was also part of the same exercise. ITAT remarked that simply because the piece of land has been bifurcated into five different parts to make it saleable after a long period of five years from the date of investment, per se cannot grant the character of “stock-in-trade” so as to give it a colour of business activity or adventure in the nature of trade. It has held that there is nothing to show that the first step of purchase of land was taken in the course of a trading transaction. What was realized on the sale of land was accretion to the capital—Therefore, the asset sold is a capital asset and the profits earned has to be considered as capital gains.
ITAT relied upon Jankiram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC), CIT vs. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad), CIT vs. Holck Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC) and Asstt. CIT vs. Ashok Motilal Kataria (2009) 308 ITR (At) 298 (Pune) & G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC).
The copy of the order is as under:
Asstt. CIT Vs. Himanshu Garg
ITAT, DELHI ‘B’ BENCH
Judge(s) Kul Bharat, J.M. & Dr. B.R.R. Kumar, A.M.
ITA No. 819/Del/2020; Asstt. yr. 2014-15
Date of decision 30th May, 2024
Source : (2024) 232 TTJ (Del) 472 : (2024) 38 NYPTTJ 741 (Del)
*Also Himanshu Garg vs. Asstt. CIT (C.O. No. 112/Del/2022; Asst. yr. 2014-15)
Statutes referred to :
Income-tax Act, 1961, ss. 2(13), 28(i) & 45
Case decided in favour of :
In favour of : Assessee
ORDER
DR. B.R.R. Kumar, A.M. :
The present appeal and the cross objection have been filed by the Revenue and the assessee against the order of learned CIT(A)-36, New Delhi dt. 16th Dec., 2019.
2. Following grounds have been raised by the Revenue :
“1. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred in treating the transaction of sale of land (vide Deed No. 72 at Pataudi) as ‘capital gains transaction’ which was duly established and treated by the AO as ‘adventure in the nature of trade’/business transaction and accordingly the consequent income as ‘income from business’.
2. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred by allowing the assessee the claim of indexation both on cost of acquisition and improvement of land sold at pataudi vide deed No. 72, against the transaction which was duly established and treated by the AO as ‘adventure in the nature of trade’/business transaction.
3. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred by allowing full cost of improvement of land against the sale transaction for portion of the land which was allowed by the AO proportionately.
4. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred by allowing full cost of improvement of land along with indexation in the case of land sold at Pataudi vide deed No. 987 despite the fact that the assessee has failed to substantiate the claim of cost of improvement during the assessment proceedings. The AO has categorically mentioned that the cheques regarding cost of improvement were issued by the assessee in October, 2007 whereas the impugned property was purchased on 26th March, 2008 and the said fact was not duly appreciated by the learned CIT(A).
5. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 47,53,116 made on account of disallowance of ‘cost of improvement and indexation without appreciating the fact that the assessee has failed to substantiate the said claim before the AO.
6. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 30,65,000 without appreciating the fact that the said addition was made by the AO on account of disallowance of claim regarding ‘cost of Improvement and indexation as the assessee has not submitted any documents/evidences or details of the expenses nor payments made in respect of such cost of improvement.
7. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 18,77,750 and Rs. 20,30,250 without appreciating the fact that the said additions were made by the AO on account of disallowance of claim regarding ‘cost of acquisition’ of land at Pataudi and ‘cost of improvement’ and indexation when the AO has given a clear cut finding that authenticity of cost of improvement was not verifiable.
8. Whether on the facts in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 1,84,23,729 made by the AO on account of disallowance of exemption claimed by the assessee under s. 54F of the IT Act, 1961 without appreciating the fact that the AO has established that the assessee is not satisfying the conditions laid down for claim of exemption under the said section.”
3. In C.O. No. 112/Del/2022, following grounds have been raised by the assessee :
“1. That the learned CIT(A) has erred in not allowing the additional ground of appeal taken by the respondent wherein he has made a fresh claim of exemption also allowable under s. 54B of the Act with reference to long-term capital gains arising on sale of land vide deed No. 2618 amounting to Rs. 47,49,202.
2. That the learned CIT(A) has erred in not allowing the additional ground of appeal taken by the respondent wherein he has made a fresh claim of exemption also allowable under s. 54B of the Act with reference to long-term capital gains arising on sale of land vide deed No. 987 amounting to Rs. 4,24,182.”
4. The assessee declared total income of Rs. 92,71,320 in the return of income filed on 30th Nov., 2014 and the case was selected for limited scrutiny for examination of large deduction claimed under s. 54 of the IT Act, 1961, large value sale consideration of property and cash deposits.
5. During the year, the assessee declared long-term capital gains of Rs. 66,23,908 and short-term capital gain of Rs. 2,28,405 and claimed exemption under s. 54F of Rs. 1,84,23,729. The details of the capital gains are as under :
Long-term capital gains
1. Deed No. 72 | Rs. 5,93,000 |
2. Deed No. 821 | (loss) Rs. 2,59,000 |
3. Deed No. 987 | Rs. 47,49,200 |
4. Taj Land | Rs. 1,84,23,729 and claimed exemption under s. 54F |
5. Other Land | Rs. 15,40,600 |
Total LTCG | Rs. 66,23,000 (excluding s. 54F) |
Short-term capital gains
1. Patudi Nabab – 1 | Rs. 5,58,475 |
2. Patudi Nabab – 2 | Rs. 4,24,000 |
Total | Rs. 9,82,000 |
6. The AO examined each transaction and re-determined the capital gains.
1. Deed No. 72 | Rs. 5,93,000 |
7. The details submitted by the assessee before the AO pertaining to the transactions of deed No. 72 are as under :
Cost of acquisition | Rs. 13,46,820 |
Cost of improvement | Rs. 21,59,570 |
Sale consideration | Rs. 62,50,250 |
LTCG | Rs. 5,93,000 |
8. The AO held that out of the total cost of improvement of Rs. 21,59,570, the assessee has paid Rs. 7,50,000 by cheque and the remaining amount was paid by cash. The AO issued notice under s. 133(6) to Sh. Kishan Pal, the alleged contractor for improvement of land, which was returned unserved. Later, a reply has been received from the contractor that the work was done in the year 2010 whereas the assessee claimed that the work was undertaken in the year 2008. Further, the AO held that the assessee has sold only half portion of the land, hence he cannot claim the entire cost of improvement while computing the capital gains. The assessee sold only 30 marla of the total of 60 marla. After taking into consideration, the area of the land sold which is 50 per cent, the AO recomputed the profits as under :
Cost of acquisition | Rs. 13,46,820 |
Cost of improvement Rs. 21,59,570 to (i.e. 50% of improvement of Rs. 21,59,570) | Rs. 24,26,606 |
Sale consideration | Rs. 62,50,250 |
Profit on sale of land (LTCG) | Rs. 38,23,644 |
9. The AO determined the profits as receipts from adventure in the nature of trade and refused to treat the receipts as capital gains. The reason for treating the transaction as adventure in nature of trade was that the assessee has spent Rs. 20,00,000 on the land measuring 16350 sft. which is more than Rs. 100 per sq. ft. in the year 2008 and that is nothing but adventure in nature of trade. The AO further held that a single transaction of purchase and sale may be outside the assessee’s line of business and it can constitute an “adventure in the nature of trade”.
10. Aggrieved, the assessee filed appeal before the learned CIT(A).
11. The learned CIT(A) deleted the addition holding that as regards the treatment to be given to the impugned transaction of sale of plots carved out of Deed No. 72, only based on the principles settled by the Hon’ble Courts on the issue of treatment of a transaction as “adventure in nature of trade” vs. “capital gain” arising out of investment and consequent sale.
12. The learned CIT(A) relied on the judgment in the case of Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC) wherein it was held that,
“If a person invests money in land intending to hold it, enjoy its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are relevant, such as, e.g., whether the purchaser was a trader, and the purchase of the commodity and its resale were allied to his usual trade or business or incidental to it, the nature and quantity of the commodity purchased and resold; any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resaleable; any act prior to the purchase showing a design or purpose; the incidents associated with the purchase and resale: the similarity of the transaction to operations usually associated with trade or business; the repetition of the transaction; the element of pride of possession. A person may purchase a piece of art, hold it for some time and, if a profitable offer is received, sell it. During the time that the purchaser had its possession, he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld, that would be a factor against the transaction being in the nature of trade. The presence of all these relevant factors may help the Court to drawn an inference that a transaction is in the nature of trade, but it is not a matter of merely counting the number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is the total effect of all the relevant factors and circumstances that determines the character of the transaction.”
13. In Jankiram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC) , it has been held that the mere fact that the owner of an immovable property takes steps to enhance its value before selling it does not amount to an adventure in the nature of trade.
14. In the case of CIT vs. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad) , the assessee had even parceled the land into plots and incurred expenses for laying roads on filling up, corporation survey and other matters, yet the Court held that these steps were no more than enabling the assessee to earn a better price rather than plunging into the waters of trade.
15. In CIT vs. Holck Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC) it was held that the real question is not whether the transaction lacks the element of trading but to see whether the first step of the transaction was not taken as, or in the course of, a trading transaction. Applying the said principle it is to be seen in the facts of the appellant’s case that when the land was originally purchased there is nothing to show that this first step (of purchase of land) was taken in the course of a trading transaction.
16. In CIT vs. Ashok Motilal Kataria (2009) 308 ITR (At) 298 (Pune) , it has been held that the assessee was not a dealer engaged in real estate business and the land was not held as a stock-in-trade. Merely because the assessee had the intention to make good profit on the basis of information that the land was to be converted from agricultural zone or non-industrial zone to industrial zone, that by itself was not enough to assume that the assessee had purchased the land as an adventure in the nature of trade. Even, mere carving out the plots and selling them to different persons could not be assumed to be an adventure in the nature of trade, unless some more activities in the nature of business were carried out.
17. It is a matter of record that the assessee has held the entire piece of land for 5 long years and that fact in itself shows the Intention of the assessee to make investment in the said plot for capital appreciation. That the improvement made in the plot of land which was barren and uneven by resorting to land tilling, fencing etc, was only with a view to make the land saleable and further plotting of the said land was also part of the same exercise. Simply because the piece of land in this transaction has been bifurcated into 5 different parts to make it saleable after a long period of 5 years from the date of investment, per se cannot grant the character of the said pieces of land as “stock-in-trade” so as to give it a colour of business activity or adventure in the nature of trade. Applying the principles emerging from the above cases to the facts and circumstances of instant case it is held that there is nothing to show that the first step of purchase of land was taken in the course of a trading transaction. The land was kept well over 5 years. What was realized on the sale of land was accretion to the capital. It is not a case where the appellant can be said to have plunged into the waters of trade.
18. Having gone through the undisputed facts on record that the assessee held the entire piece of land for more than 5 years cannot give it a colour of “adventure in the nature of trade”. Applying the principles laid down by the various judgments, we hold that the asset sold is a capital asset and the profits earned be considered as capital gains. Order of the learned CIT(A) on this issue is affirmed.
2. Deed No. 987 – Rs. 47,49,200 and cross-objection
19. As per the AO,
—
Assessee purchased 4 Kanal for Rs. 18,72,500 on 28th Sept., 2010
—
Assessee purchased 15 Kanal 19 Marla for Rs. 54,00,000 on 26th March, 2008
—
Assessee sold 16 Kanal 11 Marla for Rs. 2,06,88,000
—
Assessee disclosed capital gains of Rs. 47,49,201
20. The AO found that the assessee has claimed cost of improvement of Rs. 29,46,021 on the improvement of land. The assessee produced a bill dt. 1st July, 2008 on the letterhead of one Sh. Mahender Singh, Thekedar. The assessee claimed that an amount of Rs. 16,80,000 was paid in cheque and Rs. 15,000 was paid in cash. The AO held that on verification of the bank account, the payments made through cheque was in October, 2007 not in 2008 that is even before the purchase of property on 26th March, 2008. The AO held that the assessee cannot claim expenses on account of payment for improvement even before the date of purchase of land. Holding thus, the AO disallowed the cost of improvement in computation of capital gains.
21. Further, the AO has also not allowed cost of improvement of Rs. 30,65,000 being the cost of improvement claimed while computing the short-term capital gains on the sale consideration of Rs. 53,71,682 (p. 13-AO).
22. Before the learned CIT(A), the assessee claimed exemption under s. 54B. The learned CIT(A) did not allow the claim of exemption under s. 54B on the grounds that it was not filed along with the return. The factum of eligible claim cannot be denied to the assessee. Hence, the matter is referred to the file of the AO to examine the date of purchase of the property as per the provisions of s. 54B and take a decision in accordance with the provisions of the Act. The appeal of the assessee on this ground and the CO of the assessee is allowed for statistical purpose.
3. Deed No. 986 – Rs. 39,08,000
23. As per the AO,
—
The assessee purchased land on 28th Sept., 2010 for a total cost of Rs. 34,14,500.
—
Out of the total land acquired, the assessee sold 50 per cent of the land.
—
The assessee sold the property on September, 13th and August, 13th
—
The assessee claimed cost of improvement of Rs. 20,30,250.
—
The assessee produced a bill dt. 10th Jan., 2011 on the letterhead of once Sh. Darshan Pal, Thekedar.
—
The assessee claimed the entire amount has been paid in cash.
24. The AO held that no evidence in respect of payment has been furnished, no identity proof of Sh. Darshan Pal was submitted, no address of Sh. Darshan Pal and contact number has been submitted in the reply given to the AO.
25. The learned CIT(A) deleted the addition holding as under :
“7.2 With respect to the above ground of appeal which is in reference to disallowance of half of the cost of acquisition and further the entire cost of improvement, the submission of the appellant is twofold. As regards the disallowance of cost of acquisition it has been submitted that while it is true that the assessee/appellant did not sell the entire piece of land evidenced by deed, but the claim of entire cost of acquisition to be deducted from the sale consideration was made on the peculiar facts on hand. That the assessee had purchased the land which was irregular in shape and the prospective buyers were not ready to buy the entire piece in such shape. That it is through process of strenuous negotiations that the assessee was able to make a deal of three pieces which have been parted off in haphazard manner of land parcels on the total plot size leading to narrow and irregular vacant spaces abutting these plots. Thus the so called left over strips of land even while remaining to continue in assessees possession is not saleable as it does not have any market. In support of this submission the appellant has enclosed the map of land showing such strips, enclosed as Annex. E. Further, a letter from patwari of “Pataudi” dt. 14th Nov., 2014 (Annex. F) in relation to the land has been also enclosed in which it is clearly mentioned that balance land has been left for using the path to different plots and is not usable by the assessee.
It has been submitted that it is in this context that the entire cost of acquisition of the land in Deed No. 986 was adjusted against the sales consideration. That viewed differently it is as good as an extinguishment of appellant’s saleable rights on the land and accounting wise it would be fair to apportion value of this unusable vacant land to each of the plot whereby the result shall be the same. Consequently it has been submitted that the assessee’s claim for full cost of consideration be allowed.
7.3 As regards the disallowance of cost of improvement the substance of the Appellant’s submission is that that a detailed labour bill dt. 10th Jan., 2011 of the contractor Sh. Darshan Pal had been filed and the scanned copy of which has been reproduced in the assessment order. That this has five different nature of work namely knocking down of old houses, clearing the ground, land filling, leveling and construction of boundary. That all these expenses were the natural corollary of the kind of plot that the assessee had purchased. Having allowed the compensation, the expenses incurred to clear the land and level it was clear case of attempt to improve the assets and hence and allowable expense. Similarly demarcating the plot by constructing a boundary to avoid any further encroachment was also to secure and improve the plot of land. It is incorrect to say that any information or evidence was not filed. The appellant did file copy of contract, copies of bills sand, earth bricks etc. The bill of the contractor was also filed before the AO. The reality is that that most of these expenses were incurred on that part of land which got transacted. That is why these portions got sale worthy. Hence the need and factum of having incurred expenses stand duly supported by the circumstances and the assessee had discharged the initial onus.
That as regards the non service of notice under s. 133(6) it has been submitted that these are nomadic labour contractors who keep moving in the area and normally do not have permanent address. The events in question relate to the period 2010, which is quite back in time. Locating them in 2016-17 would be a stupendous task. Therefore in the circumstances non-service cannot be used against the appellant. Regarding the payment in cash it needs to be appreciated that these payments are disbursed over a period of time of holding the property and not is onetime payment. The assessee is not running a business and hence not maintaining formal books of accounts in the context. Otherwise this has been met out of cash in hand. The assessee/appellant has also placed on record his letter to Nagarpalika of Patuadi (Annex. G) in response of a notice (the same is enclosed), in support of his claim that assessee has incurred certain expenses for maintenance and development of land till the time of sale of land. That therefore the appellant is clearly entitled for the entire payments made to the contractor, both by cheque as well as by cash, amounting to Rs. 20,30,250.
7.4 I have carefully considered the facts of the case with reference to the Ground of Appeal No. 5. As regards the issue of restricting the cost of acquisition to an amount of Rs. 15,36,525 instead of full claim of cost of acquisition at Rs. 34,14,500, the essence of the submission of the appellant is that in the peculiar facts of the this case the entire cost of acquisition is required to be deducted from the sale consideration for the reason that part of the entire plot had to be bifurcated before sale as it was irregular in shape and was not saleable. In support thereof the appellant has also provided the copy of the site plan of the said plotting. That the non sold piece of land is for the purpose of providing right to way for going to other plots and therefore is permanently unsaleable and therefore the entire cost of acquisition has to be loaded on the sold land, so as to work out the short-term capital gain arising of the said transaction. In support thereof the appellant has also provided the confirmation given by Halka patwari, Pataudi to Tehsildar Pataudi on 14th Nov., 2014, evidencing the present status of the left over unsold part of 33 Marla out of the total 60 Marla Plot in Deed No. 986. From the evidences filed on record it is seen that the claim of the appellant is justified and in the facts of the case the entire cost of acquisition is required to be deduced from the cost of sale consideration. Accordingly the AO is directed to allow the cost of acquisition at Rs. 34,14,500 instead of the same claim having been restricted by the AO at Rs. 15,36,525.
As regards the disallowance of the cost of improvement of Rs. 20,30,250 is concerned that while the assessee had submitted the details of work of land filling, cleaning, demolition of old structure and plinth wall and brick walls through Sh. Darshan Lal, the Contractor whose final bill is dt. 10th Jan., 2011, it is seen that the same has been summarily rejected by the AO without making any necessary inquiry from Darshan Pal whose office address has been provided at Mumtajpur, Teshsil Pataudi, District Gurgoan. That not much can be made of the non-service of the notice under s. 133(6) issue to Shri Darshan Pal, more so in face of the fact that a hand written reply in his name has been received through post in the office of the AO on 26th Dec., 2016. The appellant had filed copy of the contract copy of signed bill and earth brick bills evidencing construction of boundary to avoid any encroachment on the sold piece of land. In support of fencing/construction of brick wall the assessee has also provided copy of letter written to secretary, Municipality, Pataudi dt. 10th Oct., 2011. Thus taking into totality all these contemporaneous evidences as also the fact that it is the AO who had all the powers to enforce the attendance of Darshan Pal the contractor, the addition made by the AO by disallowing the cost of improvement for Rs. 20,30,250 is directed to be deleted and the ground of appeal No. 5 is allowed.”
26. Having heard the arguments of both the parties. We find that the learned CIT(A) has given relief observing,
—There was an old house which has to be demolished.
—Land has to be cleared, filled and levelled.
—Boundary was constructed.
—The fact that half of the land was sold has been accepted.
—The land was irregular in shape and the site plan of the plotting has been examined.
—From the examination of the above, the learned CIT(A) held that the remaining land was unsaleable, hence the entire part of improvement has to be loaded on the said land.
27. Since, a categorical finding has been given by the learned CIT(A) with regard to the shape, boundary, ground leveling work, the area of the plot sold and unsaleable land parcel. We find no reason to interfere with the order of the learned CIT(A) in allowing the cost of improvement.
4. Taj Land — Rs. 1,84,23,729 and exemption under s. 54F
28. For the sake of brevity and ready reference, the relevant portion of the assessment order is reproduced as under :
“10.2 The assessee during the relevant period has sold a property known as Taj Land for a consideration of Rs. 3,23,88,500 to Taj Real Estate (P) Ltd., Okhla, New Delhi on 27th June, 2013. This property is situated in Farookh Nagar Tehsil, District Gurgaon (now Gurugram). The assessee had purchased different small lands in November, 2007 from different persons (total 10 different deeds) which were sold during the relevant period under a single registry to Taj Real Estate Developer. The details of purchase of above land by the assessee is tabulated hereunder :
Description of the property | Date of sale | Area of sold property | Sale consideration | Remarks |
Ten properties purchases totalling to 39 Kanal 7 Marla 7 Sarsai as under :
4 Kanal at Khata No. 659/697 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 8,00,000 + Rs. 48,000 Stamp duty on 23/07/2007. 6 Kanal 9 Marla at Khata No. 61/64 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 16,12,500 + Rs. 97,000 Stamp duty on 15/11/2007. 6 Kanal 9 Marla at Khata No. 61/64 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 16,12,500 + Rs. 97,000 Stamp duty on 15/11/2007. 4 Kanal 6 Marla at Khata No. 61/64 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 10,75,000 + Rs. 64,500 Stamp duty on 15/11/2007. 3 Kanal 18 Marla at Khata No. 59/61 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 9,62,500 + Rs. 58,000 Stamp duty on 15/11/2007. 7 Marla 7 Sarsai at Khata No. 62/65 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 1,00,000 + Rs. 6,000 Stamp duty on 15/11/2007. 4 Kanal 5 Marla at Khata No. 59/61 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 10,70,000 + Rs. 64,200 Stamp duty on 16/11/2007. 3 Marla at Khata No. 62/65 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 37,500 + Rs. 2,250 Stamp duty on 19/11/2007. 2 Marla at Khata No. 62/65 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 90,000 + Rs. 5,400 Stamp duty on 16/11/2007. 6 Kanal 8 Marla at Khata No. 59/61 Farukhnagar Teh. Pataudi, Dist. Gurugram purchased for Rs. 10,70,000 + Rs. 64,200 Stamp duty on 19/11/2007. |
27/06/2013 | 39 Marla | 32388500 |
10.3 The assessee has worked out the capital gains on the above sale as below :
Sales consideration : | Rs. 3,23,88,500 |
Less : Cost of acquisition-81,94,450*939/551 = | Rs. 1,39,64,771 |
Long-term capital gain | Rs. 1,84,23,729 |
Less : Exemption under s. 54F (-) | Rs. 1,84,23,729 |
Analysis of claim of exemption under s. 54F of the Act :
10.4 The assessee in support of his claim under s. 54F has furnished a copy of registered deed dt. 11th July, 2013 purchased by assessee jointly in the name of Smt. Meenu Gupta, Smt. Nirmal Garg and Shri Himanshu Garg (assessee). On perusal of this registry, it is observed that the purchased property is a land of 4 bigha, 8 biswa (appxt 1 Acre) comprising of a constructed area of 500 sq.ft. The total cost of above property paid by the co-owners was Rs. 5,41,36,367 (Five crore forty one lacs thirty six thousand and three hundred and sixty seven). The share of the assessee in the above property is 47.5/119 from the total land of 4 bigha 8 biswa (appx. 1 Acre) and constructed area.
10.5 On perusal of the documents of registry of the property it is observed that the claimed property was mainly a land of about one Acre size where a covered area of a size of 500 sq. ft. is also stated to be situated. Further, it is nowhere mentioned in the registry that said constructed building is a residential house. The registry mentions a covered area of 500 sq. ft. or a “Makan”. It does not say a “Rihayshi Makan” or residential house. Thus, the claim of assessee under s. 54F was not evident from the documents provided in his support.
10.6 Meanwhile, the inspector of this office was directed to visit the said property to ascertain the correctness of the claim of the assessee. On his visit to the said property he found that a concrete-brick manufacturing unit is being run by one Shri Bharat Bhushan under the name of M/s Surabh Ferrocon. The photograph of the said premises taken by the Inspector is reproduced overleaf :
10.7 In view of the above the assessee was show caused vide this office letter dt. 21st Nov., 2016 to prove his claim under s. 54F. The assessee vide reply dt. 2nd Dec., 2016 submitted that the assessee had obtained a domestic connection of 1 KW after the purchase of the property which proves that the said building was a residential house. It was also asserted that the premise was purchased by assessee with a view to reside with his parents by using the entire land and the said building as residential house. The assessee also relied upon the registered documents where it is mentioned that the said property comprises of an area of 500 sq. feet constructed building. As far as the approval of construction for residential house, it was mentioned that there was no need on the part of the assessee to obtain any approval of construction since he had bought an already constructed house. The assessee has also submitted a certificate from town and country planning dt. 1st Dec., 2016 which says that the said land is a residential land. As per the letter plot in Khasra Nos. 257-258 sector 104, Gurgaon is shown as a part of residential land in the Master Plan of Gurugram. Further the assessee has also relied upon the Khasra issued by the patwari where it is mentioned that a “Makan” is also situated in the Khasra of agricultural land purchased by the assessee. With regards to the present situation of the property where an electricity connection of 45KV has been taken by the assessee in 2016 it has been stated that the present status of the property does not prove that when the property was purchased it was not a residential house.
10.8 The submission made by the assessee has been duly considered. It is not a matter of dispute that whether a constructed structure or ‘Makan’ was a part of the property purchased by the assessee. The registered sale deed as well as the Khasra issued by the patwari clearly mentions this fact. The issue under examination is as to whether the said ‘Makan’ was a Rihayashi Makan (Residentail House) or any other type of ‘Makan’. Further, if at all this covered area was a residential house, is the assessee eligible to claim deduction under s. 54F on the entire property being mainly a land of about one Acre size.
10.9 It is the duty of the assessee to satisfy with the evidences to prove any claim made under s. 54F of the Act. More so when at present there is a permanent connection of 45 KW and a factory is being run from the said place. Merely having a domestic electricity connection does not prove that it was a residential house. The assessee was requested to furnish the evidences to prove that how a small area of 500 sq. ft. which was purchased jointly in the name of 3 co-owners could be eligible for deduction under s. 54F on a land of more than 90 times size for which the total investment of Rs. 5,41,36,367 was made. The assessee has not been able to substantiate his claim in respect of the residential house.
10.10 Supreme Court in Associated Indem Mechanical (P) Ltd. vs. West Bengal Small Scale Industrial Development Corporation Ltd. (2007) 3 SCC 607 explained the meaning of “residential” as follows :
‘A residence ordinarily means a place where one resides; the act or fact of abiding or dwelling in a place for some time; an act of making one’s home in a place. “Residential” ordinarily means-used, serving or designed as a residence or for occupation by residents; relating to or connected with residence. Gardens or grounds or any furniture supplied or fittings or fixtures affixed in a building or seat in the room can by no stretch of imagination be called or said to be a residential building, but they are included in the definition of premises.’
10.11 Further, in the case of Amit Gupta vs. Dy. CIT (2006) 6 SOT 403 (Del) it was held that “The requirement of law is that the property should be a residential house. The expression residential house has not been defined in the Act. The popular meaning of the word is a place or building used for habitation of people. It is used in contradistinction to a place which is used for the purpose of business, office, shop, etc. It is capable of being used for the purpose of residence than the requirement of section is satisfied.”
10.12 The assessee was expected to establish the said building to be called as residential house, by furnishing documents of following nature:
- The plan of the house and the approval for construction from the relevant authorities.
- Title deed.
- Tenancy agreement, if any.
- Photograph, if any. habitability of the building for the purpose of residence which may include kitchen, bathroom etc.
10.13 The assessee has however, not been able to furnish conclusive evidences in support of his claim. It was also observed on perusal of the registry deed that in the column of the type of land it was mentioned as “Araji Jarai” which means agriculture land. For ascertaining the nature of land a letter was issued to the Sub-Registrar/Tehsildar of the area. He was also requested to intimate about the value of constructed area taken for stamp duty purpose. The reply received from the Tehsildar is reproduced under :
It may be seen from the above letter that the Sub-Registrar has categorically stated that the meaning of the word “Araji Jarai” is an agriculture land. Further it stated that out of the total stamp duty only Rs. 20,500 was charged against the covered area and stamp duty of Rs. 33,99,500 was for the remaining agricultural land.
10.15 The inquiries conducted by this office, therefore, establishes that the claimed investment of Rs. 1.84 crore was not in the purchase of a residential house but was for the purchase of a land. It may be seen that the nature of the property purchased by the assessee is not a residential house but an urban agricultural land where some constructed area was existing when the assessee purchased it. This structure may have been used for any purpose but there is nothing on record to prove that it was a residential house. For claiming exemption of Rs. 1.84 crores under s. 54F the assessee has made investment jointly with two other buyers in a 500 sq. ft, of constructed area whose market value as per the registrar was Rs. 3,25,000 and on which stamp duty of Rs. 20,500 was charged from the buyers. It is obvious that the investment was primarily in the land and not in the residential house as claimed by the assessee. The total area of the land was about 45,000 sq. ft. and the covered area was of 500 sq. ft. as per the registry. A question here arises as to whether the remaining land can be claimed to be Land appurtenant to the house in this case.
10.16 Here, it may be noted that IT Act does not define “lands appurtenant to”. In simple terms, it means the lands which are attached to the building and which can be considered part and parcel of the said building or buildings. In other words lands appurtenant is that land which is necessary for enjoyment of the building.
If there is any evidence to indicate that any portion of the land contiguous to the building was applied to user other than the enjoyment of building, then that provides a safe indication regarding the extent of land applied for such user. For instance, the land used by the occupiers for commercial or agricultural purpose although forming part of the land adjacent to the buildings, does not qualify to be treated as land appurtenant to the building.
Further, if any material pointing to the attempted user of the land for purposes other than the effective and proper enjoyment of the house would also ‘afford a safe guide to determine the extent of surplus land not qualifying to be treated as land appurtenant to the building.
10.17 In the present case, there is not an iota of doubt to hold that the constructed area and the land are not one unit or inseparable unit. Out of the total area of the land of about 45,000 sq. ft. only 500 sq. ft. is the area of constructed portion with no evidence of use as a residential house. The assessee has not been able to produce any evidence in his support on this point. Therefore, the land of about 45,000 sq. ft cannot be stated to be a land appurtenant to the house as claimed by the assessee.
10.18 My views find support from the case law cited High Court of Kerala Smt. Asha George vs. ITO (2013) 83 DTR (Ker) 217 : (2013) 351 ITR 123 (Ker) where the Hon’ble Court on the similar issue concluded as under :
‘12. Sec. 54F is intended to encourage construction of or acquisition of residential house with the aid of the proceeds from the transfer of any long term capital asset, which is not a residential house. The provision contemplates computing the cost of the residential building, but the value of the plot on which the farmhouse stands and the land appurtenant could also be considered. The Tribunal has categorically found that the appellant has not produced material to show that the entire area of 1.92 acres should be considered as land appurtenant to it. It is in such circumstances, the tribunal made an estimation and directed that the value of the plot on which the farmhouse is located and the land appurtenant be fixed as Rs. 2 lakhs. We are unable to accept the contention of the appellant that the value of the entire land must be considered in arriving at the value of the residential building.’
10.19 In view of the above the claim of assessee that the amount of capital gain was invested in purchase of a residential house is not proved on the basis that, the facts gathered during the course of assessment and the documents placed on record.
10.20 Without prejudice to the above, even if the constructed area of 500 sq. ft. is treated to be a residential house, the claim of the assessee will be restricted to the value of the house and his share in the said house. As per the Sub-Registrar its value was appxt. Rs. 3.50 lacs (stamp duty of Rs. 20,500 charged @ 6 per cent of the market rate of the property) and the share of assessee in that house comes to Only Rs. 1.75 lacs. Thus out of the total claim of Rs. 1.84 crores, if the assessee is eligible at all under s. 54F, he will get a deduction of only Rs. 1.75 lacs.
10.21 However, in this case the facts clearly establish that the claim of assessee under s. 54F is not as per the conditions laid down in the Act. The Hon’ble Supreme Court in the landmark judgment of Sumati Dayal vs. CIT observed as overleaf :
‘It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee.’
10.22 The Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC) observed the often quoted following relevant observation :
‘It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a. case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.’
10.23 In view of the facts and circumstances of the case and on the basis of inquiry conducted the only irresistible conclusion which can be drawn is that the claim of assessee under s. 54F is not as per the conditions laid down in the Act. Therefore, an addition of Rs. 1,84,23,729 is being made to the total income of the assessee on account of disallowance of exemption under s. 54F of the IT Act, 1961.”
29. Aggrieved, the assessee filed appeal before the learned CIT(A).
30. The learned CIT(A) deleted the addition holding that the assessee has purchased a house “Makan”, hence the exemption under s. 54F is to be allowed.
31. For the sake of ready reference, the arguments taken up by the assessee before the learned CIT(A) and the decision of the learned CIT(A) is reproduced below :
“8. In Ground No.6 the appellant has contended that the AO has erred in refusing to give the benefit of s. 54F to the assessee, with respect to investment made in a residential house out of proceeds of land sold at Taj Real Estate (P) Ltd., on the ground of having not proven his claim and consequently made an addition of Rs. 1,84,23,729.
It has been submitted that through oversight this ground could not be filed originally and that the said ground may kindly be therefore admitted.
In the interest of justice, the said ground of Appeal No. 6 is hereby admitted.
8.1 From the assessment order it is seen that in support the claim of s. 54F the assessee has furnished copy of registered sale deed dt. 11th July, 2013 of the property purchased by the assessee jointly in the name of Smt. Menu Gupta, Smt. Nirmal Garg and Shri Himanshu Garg (the assessee). The AO notes the purchased property is a land of 4 Bigha 8 Biswa (approximately 1 acre) comprising of a constructed area of 500 square feet. The total cost of above property paid by the co-owners was Rs. 5,41,36,367 and the share of the assessee in the said property is 47.5/119 from the total of 4 bigha 8 biswa and the constructed area. That the registry mentions a covered area of 50 sq. ft. or a Makaan but does not say a “or residential house”. That thus the claim of assessee under s. 54F is not evident from the documents provided by the assessee. In para 10.7 of the assessment order the AO has noted that the assessee filed a reply dt. 2nd Dec., 2016 submitting that he has obtained a domestic connection of 1 K.W. after the purchase of the property which proves that the building was a residential house. The assessee also relied on the registered documents where it is mentioned that the said property comprises of an area of 500 sq. ft constructed building. The assessee also submitted a certificate from Town and Country Planning dt. 1st Dec., 2016 which says that the said land is a residential land in the Master Plan of Gurugram. The assessee also relied on the Khasra issued by the patwari where it is mentioned that a “Makaan” is situated in Khasra of agricultural land.
In para 10.8 of the assessment order the AO notes that it is not in dispute whether the constructed structure or Makaan was part of the property purchased by the assessee. The issue under examination is whether the Makaan was a residential house or any other type of Makaan also if at all this covered area was a residential house is the assessee eligible to clain deduction under s. 54F on the entire property being mainly a land of about 1 acre size.
The AO requested the assessee to furnish the evidence to prove that how a small area of 500 sq. ft. which was purchased jointly in names of 3 co- owner could be eligible for deduction under s. 54F on a land of more than 90 times size for which the total investment of Rs. 5,41,36,367 was made. The AO has referred to the Supreme Court decision in Indem Mechanical (P) Ltd. (supra) to explain the meaning of residence. In para 10.15 the AO has therefore, concluded that from the inquiries conducted it is established that investment of Rs. 1.84 crores was not in purchase of a residential house but was for purpose of land where some constructed area was existing when the assessee purchased it. That this structure may have been used for any purpose but there is nothing on record to prove that it was a residential house. That thus it is obvious that the investment was primarily in land and not in residential house as claimed by the assessee.
In para 10.17 the AO is further of the view that out of the total area of the land of about 45,000 sq. ft. only 500 sq. ft. is the area of constructed portion with no evidence of use a residential house and that therefore the land about 45,000 sq. ft. cannot be stated to be land appurtenant to the house as claimed by the assessee. That considering the fact that the market value of the constructed area of 500 sq. ft. was Rs. 3,25,000 with the stamp duty of Rs. 20,500 in all, therefore out of the total claim of Rs. 1.84 crores the assessee is eligible of a deduction under s. 54F only to the extent of Rs. 1.75 lakhs, if at all. That however in para l0.23 an addition of Rs. 1,84,23,729 has been made by the AO by denying the claim of exemption under s. 54F.
8.2 Vide reply submitted during the appellate proceeding the assessee/appellant has inter alia submitted in substance that the purchase deed or the registry, does state that there is 500 sq. ft. Makan (Enclosed as Annex.-H). Further, the assessee has submitted a certificate from town and country planning to the effect that the area where the land is located is residential in nature. Also, the Khasra of the Patwari certifies to the existence of a “Makaan” on the land. All this goes to prove that there does exist a structure on the land which is habitable.
That relying on the decision of Tribunal, Jaipur in the case of Shyam Sunder Mukhija vs. ITO (1991) 38 ITD 125 (Jp), the appellant further submitted that the expression “Residential house” used in s. 54F has not been defined in the Act. The popular meaning of word house is a place or building used for habitation of man. Consequently residential house is a dwelling place which is used by people to reside or dwell, as against a house which is used for office or warehouse or shop. So contradistinction to a residential house is a building used for commercial or business purposes. In that light Tribunal, Jaipur held that even a farmhouse is also a residential house. Trying to put it differently, it is the purpose for which the house is used and not the size or location which is material to characterize it for the purpose of s. 54F.
The copy of the Appellate is as under:
1717069104-819 & CO 112 Himanshu Garg