Income Tax Officer, Ward 51(1) vs Harvinder Singh Kwatra

6.3

In Ground 2 of appeal, the appellant has disputed the action of the AO in treating the impugned transactions as’ adventure in nature of trade.’ instead of long term capital gains income of the appellant. The appellant has further disputed the denial of deduction u/s 54 of the Income Tax by the AO after treating the impugned transactions as adventure in the nature of trade. In additional ground of appeal 1, the appellant has disputed the action of the AO in alternatively treating the entire long term capital gains claimed by the appellant as short term capital gains, even though the period of holding of land part was more than 20 years old. In additional Ground of appeal 3, the appellant has disputed the denial of exemption/ deduction u/s 54 of the Act on the ground that the appellant has owned two houses during the relevant financial year and failed to satisfy the conditions stipulated in section 54 of the Act.

6.3.1

As stated in para 2 of the assessment order, the AO noted that the appellant had converted his property from leasehold to freehold after obtaining approval from DDA and thereafter appointed a private contractor to demolish/reconstruct the new building and marketed each floor and sold the three floors to three different buyers. As per the AO, this act of the appellant falls under’ adventure in the nature of trade ‘and thus was to liable to be taxed u/s 28 of the Act. Accordingly show cause notice dated 11/8/2022 was issued to the appellant, as quoted in the assessment order. The reply of the appellant has also been quoted in the assessment order, and it is noted that the appellant had pointed out that he is engaged in manufacturing and trading of machinery parts business since past 25 years and that he had converted the property from leasehold to freehold for the purpose of getting loan by the assessee himself and or prospective buyer of the property. The appellant had pointed out that newly constructed property would fetch better market price even though the land price always gets the better and higher price. The appellant referred to decisions of Hon’ble Supreme Court and other judicial authorities to claim that the impugned transaction is not in the nature of ‘adventure in the nature of trade’. The AO however did not agree with the contentions of the appellant and was of the opinion that the appellant replicated the actions of builder and deliberately converted the property to freehold and erected new structure to enhance its value, which was the typical modus -operandi of the builder. Accordingly, the AO taxed the entire receipts of Rs.4.05 Crore less payment of 1.05 Crore to the contractor AayushBuildTech and has thereby made addition of Rs.3 Crore as business income of the appellant and has thus denied the claim of ‘Long term capital Gains’ and thereby claim of deduction/exemption u/s 54 of the Act. The appellant has disputed the impugned addition of Rs.3 Crore as Business Income by the AO u/s 28 of the Act and consequent denial of claim of ‘Long Term Capital Gains’; of the quantum claimed by the appellant in his ITR and subsequent further denial of deduction/exemption u/s 54 of the Act. The submissions filed by the appellant have been perused along with the assessment order.

6.3.2

It is noted that it is an undisputed fact that the impugned residential property was bought and used for personal residential purposes for more than the past 30-40 years, as the same was bought in FY 1977-78 jointly by the appellant with his mother, and later his mother had gifted her portion of property to her son on 6/5/1999. Further, the claim of the appellant that he is not at all engaged in any real estate activity and was only doing business activity of manufacturing for past many years and that this sale of property held for close to 20 years by him after converting the same /constructing floors was an isolated incident has not been rebutted by the AO in any manner. The appellant has claimed that the sale of impugned property after modifications/construction is to fetch better market price and it is not an organized business activity. The appellant has relied upon various case laws to highlight that a single isolated transaction (in his case being the transaction of demolition/construction of floors by hiring a builder) cannot be treated as an’ adventure in the nature of trade ‘. The appellant has claimed that while fresh construction and freehold rights would fetch better price of property, the real appreciation is in land price and not in component of construction of property. In this regard, the appellant has referred to various decisions of Hon’ble Supreme Court, Hon’ble High Courts and Hon’ble Tribunal, as have been quoted in the assessment order and as per submissions filed before NFAC which have been quoted above.

6.3.3

It is noted that the AO has not given any credit for the cost of the asset, and has also not discussed the various claims/ replies of the appellant filed before him. Further, the legal decisions cited by the appellant (as quoted in the assessment order) have also not been discussed and distinguished and the AO has simply stated that the case laws provided by the appellant are not relevant to the case of the assessee. It is noted that the decisions of Hon’ble Supreme Court in the case of CIT Vs Sutlej Cotton Mills Supply Agency Ltd (1975) 100 ITR 376 – and Hon’ble Supreme Court in the case of Narayan Swadeshi Weaving Mills vs CEPT (1954)26 ITR 765 (SC), Supreme Court in the case of Raja bahadurVisheshwara Singh v. CIT (1961) 41 ITR 685 and the cited decisions of Hon’ble High Courts and Hon’ble Tribunals are applicable to the facts of the instant case. As per these judicial decisions, the nature of transaction, volume, frequency, continuity and regularity are important features to determine whether any transaction partakes the nature of’ adventure in the nature of trade ‘. In the instant case, the appellant had held the property for close to 40/ 20 years and used the same for residential purposes. Therefore, it is clear that the property was held as an investment by the appellant and it is clearly a Long term capital asset of the appellant, who is not a builder but engaged in manufacturing business for past many years. The claim of this activity being an isolated event is not disputed by the AO also. Therefore, the aspects of frequency and continuity of the transactions is not present in the instant case and thus an essential criterion for treating the impugned transactions as ‘adventure in the nature of trade’ is absent here. The intention of holding the property as an investment is also clear, since this property was resided for past 40/20 years approx. It is noted that the appellant has not claimed any other cost of improvement of property other than the construction cost incurred in instant FY 2019-20. Thus, there is merit in the claim of the appellant that for selling an old residential property and to fetch good value, it was necessary to convert the property from leasehold to freehold and to split the same by demolishing and constructing /converting and selling it as individual floors. This act of the appellant however does not make the entire transaction as ‘adventure in the nature of trade ‘as the necessary yardsticks/ conditions as laid down by the Hon’ble Courts/tribunals are not getting satisfied in the instant case. Further, the appellant has pointed out that the real appreciation of such long term capital asset is due to the embedded land price and not the construction component thereof. In this regard, on perusal of the copy of registered sale deed between the appellant and Mr. Narendra Singh towards sale of first floor of Karol Bagh property (para 16-calculation of circle rate), it is noted that circle rate of the land value in the said locality is considered at Rs.1,27,680 per square meters, whereas the circle rate of cost of construction is Rs.11,160 per square meter only. Thus the land value is 11.4 times the cost of construction. It is also noted from the computation of capital gains as per the appellant’s claim has been reproduced on page 4 of the assessment order. As per this calculation, the cost component of reconstruction being incurred in the relevant financial year itself is not eligible for any indexation benefit and no such benefit has been claimed by the appellant also. Further, vide his submission dated 28/3/2024, the appellant has claimed that no short term capital gains would arise on the construction part, even if the same was to be considered separately. Such claims of the appellant have not been rebutted by the AO and further no such stand to artificially segregate the two components has been taken by the AO, who has treated the entire transaction as short term capital gains on an alternate /without prejudice basis. The appellant had claimed before the AO that the Short term capital income on the construction component would be minimal and later claimed before NFAC that the same would be a loss. It is noted that the impugned transactions of demolition and construction cannot be separately considered as short term capital gains as the entire transaction of sale of immovable property is a composite and whole transaction. Further, the entire construction /demolition activity has rightly been considered as cost of improvement by the appellant which is as per the machinery provisions of computation of Long Term Capital Gains. These machinery provisions duly take into consideration the cost of improvement being in the nature of demolition /modification /construction and provide indexation based on the year of such activity. In the instant case, no indexation benefit is available to the appellant on this component and the appellant has also not claimed the same. Further, even if for argument sake, even if the construction cost is to be separately ascertained, the demolition cost would get attributed to land component to bring the land portion to its original state for sale of land to take place, which would again result in a short term capital loss for construction portion. However, Section 54 of the Act makes it very clear that the same is applicable to capital gains arising from the transfer of a long term capital asset being buildings or land appurtenant thereto and being a residential house and thus the residential building and land appurtenant thereto is required to be treated as one single composite unit only.

6.3.4

Thus, in the given facts and circumstances of the case and in law, based on the above discussion and placing reliance on the judicial decisions being relied upon by the appellant, it is not correct to treat the entire transaction as ‘adventure in the nature of trade ‘ based on the singular and isolated incident of construction /modification of impugned property. Based on the above discussion, the addition of Rs.3 Crore as business income of the appellant in para 3 of the assessment order is directed to be deleted. Further, the stand of the AO in treating the impugned transaction as ‘Short term capital Gains’ is also not found correct, based on the discussion in the paragraphs above and it is held that the asset sold is to be treated as Long term capital asset and the income arising from such sale is to be treated as ‘Long term Capital Gains ‘income.

6.3.5

The appellant has disputed the denial of deduction u/s 54 of the Income Tax Act in Ground of appeal 2 and additional Ground 2 of appeal. It is noted that the appellant has been denied deduction u/s 54 of the Act of Rs.3,12,82,020 by the AO. This issue has been discussed in para 4 of the assessment order. In the assessment order, the AO has pointed out that the appellant has sold 1st, 2nd and 3rd floor of the property at Karol Bag independently to three different buyers for a cumulative amount of Rs.4.05 Crore. Further the AO has claimed that :-“ As per s 54 of the IT Act, this benefit is available for the assessee holding only one house if the amount of LTCG is more than Rs.2 Crore. Clearly in assessee’s case this LTCG is Rs.4.05 Crores, hence this benefit is available to the assessee only if he is holding one house. But during the year AY 2020-21, assessee purchased a ground floor in VasantKunj Delhi and became the owner of property. Also he was living and was owner of ground and basement of house in Ramjas road, Karol Bag, delhi. Thus, he was owner of two different houses and was not entitled to deduction u/s 54.” Based on the above discussion, the AO issued show cause to the appellant and referred to the insertion to the proviso of section 54 of the Act stating that as per this section, the assessee cannot claim exemption u/s 54 for investment/construction of more than one residential house, if the capital gains exceeds Rs. two Crore. Based on the above reasons, the AO has disallowed this deduction/exemption u/s 54 of the IT Act.

6.3.6

The appellant has disputed the said denial of exemption/deduction u/s 54 of the IT Act. Besides making other claims on this issue as quoted above, the appellant has claimed that the A.O has wrongly referred to the provisions of Section 54F of IT Act -proviso which is not applicable to the instant case. The appellant has sold residential property and claimed deduction u/s 54 of the Act and not under Section 54 F of the Act. This claim of the appellant is found correct. As pointed out by the appellant, the relevant portion of the provisions of section 54 of the IT Act are as under:

“Profit on sale of property used for residence.

“54.

(1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i)

if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii)

if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

Following provisos shall be inserted after clause (ii) of sub-section (1) of section 54 by the Act No. 7 of 2019, w.e.f. 1-4-2020:

Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

(a)

the provisions of this sub-section shall have effect as if for the words "one residential house in India", the words "two residential houses in India" had been substituted;

(b)

any reference in this sub-section and sub-section (2) to "new asset" shall be construed as a reference to the two residential houses in India:

Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.

(2)…………………………………………….”

“Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.

54F. (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a)

if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b)

if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

Provided that nothing contained in this sub-section shall apply where— (a) the assessee,—

(i)

owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii)

purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii)

constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b)

the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".

“....Further, there is no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. There is an inbuilt restriction that capital gain arising from sale of residential house cannot be invested in more than one residential house. However there is no restriction that capital gain arising from sale of more than one residential flat cannot be invested in one residential house. The proposition that the long term capital gain arising on transfer of multiple residential houses can be invested in purchase / construction of one residential house. It is also supported by the decision of the jurisdictional bench of the Tribunal in the case of DCIT v. RanjitVithaldas [2012] 23 taxmann.com 226 (ITAT-Mum)] (ITA No. 7443 (Mum) of 2002; AY 1998-99; order dated 22.6.2012). It is held that no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential houses in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled. This aspect had been examined by the Mumbai Bench of the Tribunal in Rajesh Keshav Pillai v, ITO (2011) 44 SOT 617 (Mum.) in which it has been held that exemption u/s 54 will be available in respect of transfer of any number of long term capital assets being residential houses if other conditions are fulfilled. No rulings have been brought on record by the Id. DR to show that the capital gain arising from sale of more than one residential houses cannot be invested in one residential house. The provisions of section 54 as pointed out earlier apply to transfer of any number of residential houses by the assessee provided the capital gain arising there from is invested in a residential house. The exemption u/s 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit. The relevant para are as under:-

Mr. Bipin N. Sagar Having held that the two flats were two different residential houses, it is required to be examined whether the assessee is entitled for exemption u/s 54 of the Act in respect of the sale of more than one residential houses. We see no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential houses in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled. This aspect had been examined by the Mumbai Bench of the Tribunal in Rajesh Keshav Pillai v. ITO (2011) 44 SOT 617 (Mum.) in which it has been held that exemption u/s 54 will be available in respect of transfer of any number of Ions term capital assets being residential houses if other conditions are fulfilled. The learned DR appearing for the Revenue has placed reliance on the judgment of the Hon'ble High Court of Punjab and Haryana in the case of Pawan Arya v. CIT (237 CTR 210) supra to argue that the claim of exemption is not available in respect of sale of more than one residential house. On careful perusal of the said judgment, we find that no such proposition has been laid down in that case. The Hon'ble High Court in the said case, have only held that the capital gain arising from the transfer of a residential house is not admissible against the investment in second house. Thus, the only restriction is that the capital gain arising from the sale of one residential house must be invested in one residential house and not in two residential houses.

Another important aspect which needs to be examined is whether the exemption u/s 54 will be available, in case, capital gain arising from sale of more than one residential house, is invested in one residential house. The learned counsel appearing for the assessee argued that there was no restriction under section 54 that capital gain arising from two residential houses cannot be invested in one residential house. We find substance in the argument advanced by the Id. Counsel for the assessee. No rulings have been brought on record by the Id DR to show that the capital gain arising from sale of more than one residential houses cannot be invested in one residential house. The provisions of section 54 as pointed out earlier apply to transfer of any number of residential hoses by the assessee provided the capital gain arising there from is invested in a residential house. The exemption u/s 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit. Thus there is an inbuilt restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. In case capital gain arising from sale of more than one residential houses is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house sets fulfilled in each case individually because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years and the capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the Mr. Bipin N. Sagar time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold." (emphasis supplied)….”

In the instant case of the appellant, the appellant was owner of one house property in Karol Bag which was sold floor-wise during the relevant financial year to three different persons and the cumulative sale proceeds were investment in a single residential house only. While what was held by the appellant was only 1 house property in Karol Bagh, which was partly sold after modifications, even if each floor was to be considered as a separate house property as suggested by the AO, then also there is no violation of the conditions stipulated in section 54 of the Act in view of the above judicial decisions.

6.3.8

Based on the above discussion, it is held that the appellant is eligible for exemption u/s 54 of the I.T. Act amounting to Rs.3,12,82,020/- as claimed by him on the sale of his ‘long term capital asset’ being residential property as the long term capital gains arising therefrom has been invested in purchase of only one residential house in India.

6.3.9

Based on the above discussion in paragraphs above, the grounds of appeal 2, additional grounds of appeal 1 and additional ground of appeal 3 are considered as allowed.

6.4

In Ground of appeal 3, the appellant has disputed the addition of Rs.2,52,17,568/- under section 28(via) of the Act. The AO has dealt with this issue in para 5 of the assessment order. The AO has referred to his findings in para 2 of the assesment order where the entire transaction of the appellant has been treated as ‘adventure in the nature of trade ‘and subsequently taxed as business income. As a consequence, the AO has treated the house in Karol Bagh as inventory of the appellant and pointed out that since the appellant has decided to keep the ground floor and basement for himself, and was living in the same, the AO has stated that the appellant has accordingly converted his ‘stock-in-trade’ /inventory into capital asset and therefore it is hit by Section 28(vi) of the Act. The submissions filed by the appellant disputing the impugned addition have been quoted above, and the same have been considered. It is also noted that the appellant has claimed that he was trying to sell the basement and ground floor, which however could not be sold. In this regard, the issue of AO treating the impugned transactions as adventure in the nature of trade has already been decided in favor of the appellant while disposing earlier grounds of appeal and further the residential property owned by the appellant at Karol Bagh has been held to be a long term capital asset in the case of the appellant as mentioned in paragraphs above. Consequently, the action of the AO in treating the basement and ground floor of Karol Bagh building to be earlier held by the appellant as stock in trade /inventory is not found correct. In such circumstances, the issue of applicability of section 28(vi) of the IT Act does not arise, since there is no conversion from stock in trade to investment in the instant case. Based on the above discussion, the claims made by the appellant in Ground 3 of appeal are found correct. Accordingly, the AO is directed to delete the addition of Rs.2,52,17,568/ -made u/s 28(via) of the Act. As a result, ground 3 of appeal is allowed.

6.5

In additional ground of appeal 2, the appellant has disputed the initiation of penalty u/s 271(1) (c) of the assessment order. However, it is noted that the AO had made various additions/ dis-allowances in the assessment order, and based on the same he had initiated penalty u/s 271(1)(c) of the Act as per law. Therefore, there is no error or mistake in the action of the AO in initiating such penalty proceedings. As a result, additional ground of appeal 2 is dismissed.”

“1.

Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the additions of Rs. 3,34,05,000/- made by AO u/s 68 of the Income Tax Act, 1961.

2.

Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the additions of Rs. 3,00,00,000/- made by AO on account on treating sale as 'adventure in nature of trade' without appreciating that the AO has proved that the assessee is not eligible deduction u/s 54 of the Income Tax Act, 1961.

3.

Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs. 2,52,17,568/- made by AO on account of on section 28(via) without appreciating that the AO has established that the assessee has converted his stock to capital asset.

4.

The appellant reserves right to add, alter or amend the grounds of appeal on or, before the date of disposal of appeal.