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? Yes 2. Whether the judgment should be reported in the Digest? Yes M.M. KUMAR, J. This order shall dispose of ITA Nos. 712 and 713 of 2009 filed by the revenue under Section 260-A of the Income-tax Act, 1961 (for brevity, ‘the Act’), challenging common order dated 21.5.2009, passed by the Income Tax Appellate Tribunal, Chandigarh Bench ‘B’, Chandigarh (for brevity, ‘the Tribunal’), in cross appeals bearing ITA No. 838/CHANDI/2008 and ITA No. I.T.A. Nos. 712 & 713 of 2009 (O&M) 1007/CHANDI/2008, in respect of Assessment Year 2005-06. The question of law in both the cases revolves around the taxability of the income declared by the assessee-respondent on the sale of ancestral property, known as ‘Leela Bhawan’, situated at Patiala. The assessee- respondent had declared long term capital gain of Rs. 4,15,47,048/- and on that basis claimed deduction amounting to Rs. 2,42,61,810/- and 1,31,15,147/- under Sections 54EC and 54F respectively of the Act. Accordingly, a net taxable long term capital gain was declared for an amount of Rs. 21,17,913/- after setting off the brought forward long term capital loss for the assessment year 2004-05. The question is whether the activity of sale of land is a trading activity or it is long term capital gain. The Assessing Officer held that it is in the 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/- by determining the fair market value under Section 45(2) of the Act by fixing the rate at Rs. 8,710/- per square yard as against Rs. 15,000/- per square yard, as applied by the Assessing Officer. He further allowed the benefit of exemption amounting to Rs. 2,42,61,810/- and Rs. 1,39,17,964/- under Sections 54EC and 54F of the Act respectively and determined the net taxable long term capital gain at Rs. 88,48,758/- after granting the benefit of brought forward long term capital loss of Rs. 20,52,178/-. As far as business profit is concerned, he adopted the sale consideration at Rs. 9,65,49,135/- and determined the business income 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 issue was whether the sale of land by the assessee-respondent in the instant assessment year constitute as adventure in the nature of ‘trade or sale of capital asset’. The Tribunal applied the principles laid down by Hon’ble the Supreme 2 I.T.A. Nos. 712 & 713 of 2009 (O&M) Court in the case of G. Venkataswami Naidu v. CIT, 35 ITR 594 (SC), wherein it has been held that no single factor can be evolved to govern the decision of cases in which the character of the transaction is under consideration. The Tribunal also placed reliance on another judgment of Hon’ble the Supreme Court in the case of Raja Bahadur Kamakhaya Narain Singh v. CIT, 77 ITR 253 and also considered the view of this Court in the case of CIT v. Paragaon Utility Finances (P) Ltd., 152 ITR 7 (P&H). On the question whether the assessee-respondent has converted his capital 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 ‘Leela Bhawan’. This building was constructed by grand father of the assessee, Late Maharaja Bhupinder Singh in 1925 and gifted to the assessee by his late father Maharaja Yadvindra Singh vide Deed of gift dated 10.08.1961. A part of the building was sold in assessment years 1977-78 to 1979-80 which was accepted by the Revenue as sale of a Capital asset, though no Capital gain was finally levied as it was found that actual cost of acquisition of the property was not capable of computation as held by the Tribunal in an order dated 19.12.1994 in ITA 501/Chandi/1990 and ITA 404/Chandi/92. Thereafter, as a result of the aforesaid sale multi- storeyed buildings had come up in the area and in fact vide notification No. 4/16/97-6LG1/2187 dated 17.02.1999, the area in which the building was located was declared commercial. It is in the above circumstances that the assessee has claimed that he decided to sell the property in question and build a new house for himself. In order to do so, he obtained the approval for commercial 3 I.T.A. Nos. 712 & 713 of 2009 (O&M) use of the property and authorized one Shri Radhey Shyam for sale of such property. The Assessing Officer has not disputed that the asset so held and sold was ancestral property and was initially a Capital asset. However, in his opinion, since the assessee converted his residential property into a commercial property leaving 42% of area for roads by hiring the services of a property dealer, he held that the assessee had converted such capital asset into Stock-in-trade.” From the aforesaid para the following facts are clear. (a) It has been found that the assess-respondent owned a historical building in Patiala known as ‘Leela Bhawan’, which was built by his grand father in 1925. It was gifted to him by his 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’ by the revenue and no capital gain was levied because the actual cost of acquisition was not capable of computation. In that regard the Tribunal has cited its earlier order 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 buildings had come up and vide a notification dated 17.2.1999, the area in which the building was located was declared commercial by the Department of Local Government, Punjab. The assessee-respondent decided to sell the property in question and build a new house for himself. He obtained the approval for commercial use of the property and authorized one Shri Radhey Shyam for its sale. (d) The finding recorded by the Assessing Officer was that the asset held by the assessee-respondent and sold as such was ancestral property and it was initially a capital asset. On account of subsequent activities of converting his residential property into a commercial property leaving 42% of area for roads 4 I.T.A. Nos. 712 & 713 of 2009 (O&M) 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 by the 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 case there was no such material which may constitute the basis to hold that the assessee-respondent has converted or treated the ‘capital asset’ as ‘stock-in- trade’ attracting the application of Section 45(2) of the Act and that the presumption of the Assessing Officer could not be ratified that the assessee had converted or treated the ‘capital asset’ as ‘stock-in-trade’. The Tribunal further found that the assessee-respondent has maximised his realisation by sale of his ancestral capital asset which has been incorrectly held in the nature of trade by the Assessing Officer. Moreover, the view of this Court in the case of Kaur Singh v. CIT, (1983) 144 ITR 756(P&H), is absolutely clear where huge land attached to a bungalow was divided into plots for sale. Some of the plots were sold in the relevant assessment year and the revenue has treated the transaction as adventure in the nature of trade. This Court has held that mere fact of carving 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 of trade. Accordingly, the Tribunal has held that the assessee-respondent did not convert his ‘capital asset’ to ‘stock-in-trade’ in the financial year 2001-02 by obtaining the approval and developing the land by leaving area for roads and sale of different plots. The order of the CIT(A) has been set aside by holding that the property in question is capital asset. Feeling aggrieved, the revenue has approached this Court by claiming that the property has become ‘stock-in-trade’ and would not continue to be the ‘capital asset. 5 I.T.A. Nos. 712 & 713 of 2009 (O&M) We have heard learned counsel for the revenue-appellant at a considerable length. On 21.4.2010, when the matter came up for consideration we had adjourned the hearing to enable the learned counsel to produce any law showing that in the facts and circumstances of this case, the property belonging to the assessee-respondent could be assessed as ‘business income’ or it would continue to enjoy the status of ‘capital asset’ and assessable as ‘long term capital gain’. Ms. Urvashi Dhugga has not been able to substantiate her argument by citing any view which may be applicable to the facts and circumstances of the present case. However, she cited the view of a Division Bench of Allahabad High Court rendered in the case of I.T.O. v. Rani Ratnesh Kumari, [1980] 123 ITR 343. The aforesaid judgment would not be applicable because in that case the assessee had purchased the property and re-sold the same after developing it. There was finding of fact with regard to financial intention of the assessee who had purchased the land to improve and develop it and then sold. Therefore, we do not feel persuaded by the submission made by Ms. Dhugga. The appeals do not merit admission as no question of law, much less any substantive question of law would arise. The matter, in fact, seems to be covered against the revenue by the view taken by this Court in Kaur Singh’s case (supra). Accordingly, these appeals fail and the same are dismissed. (M.M. KUMAR) JUDGE (JITENDRA CHAUHAN) April 28, 2010 JUDGE Pkapoor 6