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,COCHIN BENCH 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 APPELLANT'S EXHIBITS ANNEXURE-A : COPY OF ASSESSMENT ORDER DATED 28/11/2007. ANNEXURE-B : COPY OF ORDER OF CIT(A) DATED 30/10/2008. ANNEXURE-C : COPY OF ORDER DATED 02/05/2011 OF THE INCOME TAX APPELLATE TRIBUNAL. // TRUE COPY // PA TO JUDGE. jg C.R. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... I.T.A.No.162 of 2011 .................................................................... Dated this the 19th day of November, 2011. 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 of rubber plantation from another concern for a consideration of Rs.408.07 lakhs. The transaction was partly funded through a loan of Rs.170 lakhs availed by the appellant from a Bank. Soon after purchase of the estate, the appellant started selling the land in pieces, and in the course of a little of over one year, the appellant sold 401.60 acres of land in pieces to 20 persons retaining only 35 acres of land with them. In fact within two months of the purchase that is in February and March, 2004 itself the appellant sold 16.26 acres to 5 persons and 384.72 acres were sold in varying extents to 15 persons during the financial year 2004-05. The gross profit on sale of the estate according to the appellant was Rs.124,57,378/-. In ITA No.162/2011 -2- the return filed for the assessment year 2005-06, the appellant conceded an income of Rs.52,16,147/- towards profit on sale of the estate under the head “income from other sources” and remitted tax thereon. However, in a note attached to the return the appellant claimed that the returning of income and payment of tax is precautionary and is subject to their claim that the transaction being sale of capital asset in the form of agricultural land does not attract any tax. After sending intimation under Section 143(1)(a) of the Income Tax Act (hereinafter referred to as the Act for short) assessment was taken up as a scrutiny assessment under Section 143(3) of the Act. The Assessing Officer after hearing the assessee's objections overruled the claim of exemption by holding that the transaction of purchase of estate and resale of the same after plotting it into several pieces within the short duration of a little over one year is a transaction in the nature of business or trade and so much so the profit or gain on the same is assessable under Section 28 of the Act. Besides disallowance ITA No.162/2011 -3- of exemption from tax claimed by the assessee, the Assessing Officer also disallowed deduction claimed towards commission and brokerage paid for failure to deduct tax at source as provided under Section 40(a)(ia) of the Act. Apart from the above, the Assessing Officer also made part disallowance of depreciation and expenses claimed on four cars used by the partners towards expenses and depreciation attributable to personal use. 2. The assessment was challenged in first appeal by the assessee. The Commissioner of Income Tax (Appeals) granted quantum relief, but sustained the assessment on profit on sale of estate as “business income”. Even though the appellate authority took the view that the claim of exemption through a note attached to the return in the form of a clarification sought without filing revised return itself is not maintainable, still he proceeded to consider assessee's claim of exemption on merit and held that the transaction of purchase of extensive plantation and plotting and selling of 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 is assessable under the head “profits and gains of business or profession”. Even though assessee filed second appeal before the Tribunal, the Tribunal rejected the appeal, against which this appeal is filed under Section 260A of the Act. The assessee has raised the following questions for our decision.:- “1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in upholding the order of the assessing officer in brining to tax the surplus on sale of agricultural land to capital gains, without even evaluating the purposes for which the sale was effected, thus not considering the relevant materials on record, rendering the finding perverse? 2. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in confirming the addition on account of disallowance of depreciation and car and jeep running expenses made on an estimate basis when the vehicles are not used for any personal purposes whatsoever? 3. Whether the Tribunal is correct in law and fact in confirming the addition made under section 40(a)(ia) being commission and brokerage is arbitrary and unjust especially when the income arising out of the receipt of ITA No.162/2011 -5- the sum is assessable in the hands of the recipients? 3. We have heard Shri.P.Balakrishnan learned counsel appearing for the appellant/assessee and learned Senior Standing Counsel Shri.P.K.R.Menon appearing for the Revenue. 4. There is no controversy on the factual position in as much as the assessee purchased 436.60 acres of rubber plantation in January, 2004 for a total consideration of Rs.4,08,07,224/-, out of which Rs.170 lakhs was raised through Bank loan. In the month following the purchase, the assessee started plotting and selling the estate in pieces and by 31/03/2005 i.e. within 14 months of purchase the assessee sold 401 acres to as many as 20 persons and realised Rs.5,31,73,500/-. The case put forward by the assessee's counsel is that the land purchased was rubber plantation, which is agricultural land and the activity carried on by the assessee is acquisition of capital asset, and the sale of the same will not attract tax on the profit because agricultural land is outside the scope of “capital asset” as defined Section 2 ITA No.162/2011 -6- (14) of the Act. However, the concurrent finding by the 3 authorities including the Tribunal is that the activity carried out by the assessee was not acquisition and holding of agricultural land for earning agricultural income. On the other hand, the assessee was only engaged in the business activity of acquiring extensive plantation, plotting into pieces and selling it to different persons within a short time to make profit from the market, where land price was steadily increasing. Learned Senior Standing Counsel appearing for the Revenue supported the findings of the lower authorities and contended that no other inference is possible from the nature of activity of the assessee other than to hold that the transaction is a trade or business activity that yielded a profit of around 42% on the investment within a short span of around one year. Even though the Honorable Supreme Court in the case of Goetze (India) Ltd. v. CIT, reported in 284 ITR 323, held that no claim of exemption can be made by the assessee by filing a letter or note to the return but such claim ITA No.162/2011 -7- should be made by way of filing a return or revised return, which the assessee admittedly has not done, we do not think we should reject assessee's claim on this ground because the lower authorities at least alternatively considered the case on merit. 5. Learned counsel for the assessee raised the contention that the land was purchased with an intention of holding it on long term basis and the assessee was compelled to sell the same because the Bank insisted immediate repayment of the loan of Rs.170 lakhs availed. Another ground raised by the assessee's counsel is that the assessee has earned agricultural income and returned the same for tax under the State Act during the period the estate was held. However the finding of the Tribunal is that the assessee did not stop sale of the land in pieces even after getting sufficient amount to repay the Bank loan. Further the assessee has no explanation as to why short term loan was availed from the Bank or even if the Bank wanted early repayment, why another ITA No.162/2011 -8- loan could not have been availed for retaining the estate. Not only that we do not find any merit in the contention but the claim lacks any bonafides because when the nature of loan was not proved before the Tribunal, they rightly assumed from the conduct of the parties that the loan availed was a short term loan for business purpose. 6. So far as the assessee's claim that the assessee carried agricultural operations and earned agricultural income is concerned, clear finding of the Tribunal is that the income earned is a paltry sum of Rs.2.59 lakhs from an extensive plantation of above 400 acres. Besides this, it is seen that the assessee started selling the estate in pieces immediately on acquisition and within two months of purchase the assessee made 5 sale transactions to 5 persons. Further in the course of financial year 2004-05 the assessee sold 384.72 acres to another 15 persons retaining only 35 acres of land with them. The profit earned in the deal is as much as 42% of the investment which only shows that the assessee intended only ITA No.162/2011 -9- to make profit in the market where land price was steadily increasing. Learned Senior Standing Counsel for the Revenue rightly pointed out that the transaction is business in real estate and only people with substantial money power can engage in a deal of this nature. We find that the Tribunal has meticulously considered the nature of transaction and concluded that the acquisition of large plantation and the systematic sale of the same within a short time is only speculative business in which the assessee got a margin of 42% on the investment. Learned Senior Counsel for the Revenue has also relied on the decisions of the Supreme Court in Raja J.Rameswar Rao v. CIT, reported in 42 ITR 179 and in P.M.Mohammed Meerakhan v. CIT, reported in 73 ITR 735, wherein the Supreme Court held that transactions similar to what the assessee has done are in the nature of business. The facts in the 2nd decision above referred is exactly similar to the facts in this case and the only difference is the estate purchased and sold in the reported decision is tea estate while ITA No.162/2011 -10- the estate in this case is rubber estate. The assessee in that case after purchase, sold much of the estate in pieces to different persons retaining a small portion. Here also after acquiring 436.60 acres of rubber plantation in January, 2004, within the course of around one year as much as 401.60 acres were sold by the assessee retaining only 35 acres with them, which is less than 10% of the land acquired by them. We do not know on what basis the assessee can contend that the assessee's intention was to acquire plantation and earn agricultural income. The nature of activity carried on by the assessee completely belies assessee's claim and in our view all the lower authorities including the Tribunal rightly held the transaction as business in real estate. We, therefore, do not find any merit in the assessee's claim for exemption from tax on the profit derived in the transaction and therefore we answer the first question against the assessee and in favour of the Revenue. 7. The 2nd question pertains to disallowance of claim of ITA No.162/2011 -11- depreciation and expenses on motor cars used by the partners of the firm. The clear finding of the Assessing Officer and the other lower authorities including the Tribunal is that none of the partners maintained personal vehicle and so much so part of use of the vehicle necessarily has to be treated as personal use warranting part disallowance of depreciation and expenses. Vehicles used are passenger vehicles like Merzedez Benz, Bolero, Scorpio and Siena and the appellant assessee has no case that the partners were maintaining separate vehicles for personal use. In the circumstances, we feel part disallowance of 20% towards personal expenses is quite justified. Moreover, we do not find any substantial question of law on this issue raised by the assessee. Consequently, we answer this question against the assessee. 8. The last question is on disallowance of brokerage, commission etc. claimed by the assessee which were disallowed on account of failure to deduct tax at source on such payments as provided under Section 40(a)(ia) of the Act. ITA No.162/2011 -12- Since the lower authorities including the Tribunal only applied statutory provision on disallowance for failure to deduct tax at source, we do not find any ground to interfere with the same. Consequently, this question is also answered against the assessee. In the result, the appeal filed by the assessee is dismissed. (C.N.RAMACHANDRAN NAIR, JUDGE) (P.S.GOPINATHAN, JUDGE) jg