The Commissioner of Income Tax, Hubli, and The Income Tax Officer, Ward - 1, Bangalore vs Pai Provision Stores, Linking Towers, Maidan 2 Cross Road, Mangalore- 575 001

These three appeals are preferred by the revenue challenging the common order passed by the Tribunal, wherein the claim of the assessee that the income from the sale of the property should be assessed under the head of capital gains and not under the head of income from business, has been upheld.

These appeals pertain to the assessment years 1996-1997, 1997-1998 and 1999-2000. The assesses is a partnership firm carrying on the business of dealing in grocery items at Mangalore in a rented premises. At the first instance, the partnership firm was consisting of Sri Annappa Pai and Smt. Shoba S Pai. They started the business under the name and style of "Pai Provision Stores" from 18.05.1984. The written partnership deed was executed on 05.07.1984. On 17.09.1986, the assessee purchased an immovable property measuring 12.96 Cents with an old building measuring 4657 Sq. feet in area and another land measuring 2.39 Cents containing foundation of building on 24.09.1988. Subsequently, another partnership deed was executed on 18.12.1988 indicating five more persons, who are none other than the sons of T. Annappa Pai. Clause No. 3 of the said partnership deed provided that the business of the partnership shall be that of dealing in all types of grocery and household articles, construction of building for sale or for letting out, acting as Contractors etc. However, it shall be open to the parties to enter into any other business or businesses, allied or otherwise, by mutual consent. Subsequently, the assessee constructed a commercial complex. After such construction, it was let out to various tenants. In the assessment years 1996-1997, 1997-1998 and 1999-2000, the assessee sold few portions of the said property and claimed capital gains This was not accepted by the Assessing Officer. He treated the income as business income. In an appeal, the appellate Commissioner confirmed the said order. Aggrieved by the same, the assessee preferred appeal to the Tribunal.

The Tribunal, on consideration of the entire material on record, held that the records revealed that the similar instance of claiming capital gains for the assessment year 1993-1994 was accepted by the revenue. After such sale of constructed portion of the property, subsequent sales are effected by the assessee after a lapse of three years. Leaving the said period, which is not accepted as capital gains, the Tribunal was of the view that the subsequent sales have been effected on account of financial problems of the partners, who incurred liability in the construction of residential house. Therefore, the said safe transactions cannot be treated as trading activity. The long gap between the first sale and subsequent sale will itself go to show that investment has been made to meet the capital so as to house business of the assessee in the constructed building. Therefore, the Tribunal accepted the claim of the assessee and accordingly, set aside the order of assessment. Aggrieved by the same, the revenue is before this Court.

The tax effect for the assessment year 1996-1997 is ?.2,31,632/-. For the assessment year 1997-1998, it is ?. 1,05,808/- and for the assessment year 1999-2000, it is ?. 78,488/-. If all the three years tax due is taken cumulatively, it exceeds ?.4,00,000/-. Therefore, it is submitted that the Revenue has preferred these appeals though in case of tax effect being less than ?.2,00,000/-per year, the revenue is precluded from filing the appeal. Therefore, we have considered these appeals on merits.

From the aforesaid undisputed facts, it is clear that the assessee is in the business of sale of grocery items. When the partnership deed was reduced into writing for the second time with the inclusion of all the family members, they expanded the object of their partnership firm to include development of property and sale of property. Reliance is placed on this clause by the assessing authority to come to the conclusion that the assessee is carrying on the business of property development. But, the material on record discloses that the assessee purchased two bits of land as there was a threat of eviction from the shops, where they were carrying on business, due to their acquisition for widening the road. The properties which are purchased by the assessee is in the hind portion of those shops. They entered into an agreement with the adjoining owners for development of the property. That is how both the properties, which were acquired by the assessee, have been developed. One portion of the property was sold in the year 1992-1993. Three years thereafter, as aforesaid, they have sold three portions failing under three different assessment years. The consideration received from the sale is utilized to clear the debt, which they had incurred for the development of the property. The assessee has let out the remaining portion of the property to different tenants and also carrying on business. 5o, the overall evidence on record discloses that though the assessee purchased the land, constructed building and sold some portions of the same, the said sale is not with the object of making any profit. It is to wipe out the liability they had incurred for the development of the property. The very fact that in a span of 10 years, there is admittedly only four sales and the remaining property continue to be in possession of the assessee and the same has been let out to different tenants and the assessee is earning income by way of rents and also carrying on business, clearly demonstrates that they are not in the business of sale and purchase of immovable property notwithstanding the fact that in the partnership deed, sale and purchase of property has been mentioned as one of the objects of the firm. In reality, the assessee is not in the business of sale and purchase of properties. Therefore, the income gained from sales effected by the assessee in respect of portions of the property, which has been developed and retained by them, would not constitute income from business That is precisely what the Tribunal has held on proper appreciation of the entire evidence on record. In that view of the matter, we do not see any justification to interfere with the impugned order passed by the Tribunal and the substantial question of law framed is answered in favour of the assessee and against the revenue.

Accordingly, these appeals are dismissed.