The land cannot be a fixed asset when the assessee has not incurred any “acquisition cost”: ITAT


The land cannot be a fixed asset when the assessee has not incurred any “acquisition cost”: ITAT

In summary, the relevant material facts are as follows. The assessee before us is an individual and filed his tax return on 22.11.2011 declaring a total income of Rs 62,16,890/-. Subsequently, the assessee filed a revised income statement on 22.10.2012 declaring a total income of Rs 65,95,420/-. Said tax return was processed under Section 143(1) of the Income Tax Act accepting returned income. In the revised return, the assessee showed the profit from the sale of two plots of land amounting to Rs.3,78,533/-. The revised return was not accepted by the taxing officer because the original return was filed late. The assessee’s case has been selected for review under CASS and after issuing formal notices u/s 143(2), 142(1) as well as a questionnaire, etc., the assessing officer has finalized the assessment by passing an assessment order under Article 143(3) ) of the law of 30.03.2014. The appraiser considered that the appraisee had neither sold the land within the framework of the AOP (Association of persons) nor traded in the land. Therefore, the valuation agent was of the opinion that it is the capital gain in the hands of the assessee. Also, the assessee did not disclose this LTCG in the original tax return, so this is an undisclosed capital gain of the assessee. During the evaluation procedure, the person evaluated presented his answer of 17.02.2014 and other observations. However, the Valuation Officer rejected the Assessor’s claim and made two additions under the heading Long Term Capital Gain (LTCG) in respect of two properties, one at Rs No. 547 Vesu and another property at RS no. 550 to Vesu, as follows:

(i) Undisclosed LTCG on sale of land at Vesu-547: Rs.39,60,335

(ii) Undisclosed LTCG on sale of land at Vesu-550: Rs.14,38,98115

Therefore, the valuation agent added to the total Rs.14,78,58,450/- (Rs.39,60,335 + Rs.14,38,98,115).

Injured by the Valuation Officer’s order, the notary appealed the case to the Ld. CIT(A) which treated the land transaction as business income instead of a long-term capital gain and partially allowed the assessee’s appeal. Injured, the tax authorities are on appeal before us.

The scholarly departmental representative (ld.DR) of the tax department argues that the income earned by the assessee from the sale of these two lands is in the nature of a long-term capital gain (LTCG) and not income from ‘company. He pointed out that these properties appeared on the balance sheet as fixed assets instead of “stock in trade” in the tax return filed for previous years. He further pointed out that the assessee deliberately failed to disclose the sale of the two plots in the original tax return when the sale was made before the return was filed and reflected the same as the profit of the business in revised return after receiving notice u/s 143(2) to avoid capital gains tax and continually changed position regarding tax incidence without providing supporting documentation supporting. Therefore, 1d DR asks the Chamber that the order issued by the evaluating officer be affirmed.

On the other hand, Ld. Counsel for the assessee defended the order made by the Ld. CIT(A).

ITAT command:

14. We have reviewed the above findings of ld CIT(A) and observed that the transactions were made by the assessee and the actual investment in the transaction was made by Shri. Dharmeshbhai Patel (abbreviated as SDP). The assessee and Shri. Dharmeshbhai Patel (SDP) has reached an agreement in which Shri. Dharmeshbhai Patel (SDP) has provided the money to purchase such a property, the physical possession of which is not possible in the name of the assessee. Therefore, these properties would then be sold for profit and the profit is shared at a ratio of 10:90 after recouping the investment made by Shri. Dharmeshbhai Patel (SDP). We note that no investment is made by the assessee. The assessee did not incur any “acquisition cost”. Therefore, land cannot be classified as fixed assets. The assessee has authorized only his name to be used in transactions and has been personally involved in the conclusion of these transactions. The income earned by the assessee is not an appreciation of his investment, but it is consideration for being part of the arrangement to profit from transactions involving land. Earned income is for personal involvement and time spent. There is no transfer of fixed assets by the assessee. Also for this reason, income earned by the assessee cannot be considered capital gains. It appears from the bank account, the amounts invested by Shri. Dharmeshbhai Patel (SDP) and 90% of the profits made on two trades are returned to his account. Sri. Dharmeshbhai Patel (SDP) has disclosed the profit made on these two transactions in its tax return under the heading “Business Income” which is accepted by order u/s 143(3) dated 03.26.2013. Since 90% of the profits from these transactions have already been taxed as “Business Income” by the Department. Uniformity principles require that the remaining 10% also be taxed as “business income” in the hands of the assessee. Considering these facts, we find no infirmity in the order of ld CIT(A). However, we refuse to interfere with Ld’s order. CIT(A) by deleting the aforementioned additions. Its order on this addition is therefore affirmed and the tax authorities’ grounds of appeal are dismissed.

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