By TIOL News Service

PUNE, JUNE 28, 2013: THE issues before the Bench are - Whether the profit and gains from the sale of asset held as stock in trade, is liable to be taxed as profit and gains from business or as capital asset and Whether the provision of section 50C has no application where transfer of immovable property is on account of sale of stock. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is engaged in the business of builders and promoters and manufacturing, trading of bakery and confectionary products and running franchise. Assessee entered into 4 development agreements for development of the property at Katraj and for that purpose has paid an amount of Rs.16,25,000/- which was shown in the balance sheet under the head "current assets". Assessee has entered into a joint venture agreement with Nikita Builders and Developers, a partnership firm and has transferred the development rights to the said joint venture as his capital contribution and valued the same at Rs.25 lakhs. After deducting the cost of acquisition of land and development rights the assessee has declared profit of Rs.5,59,000/- as his business income. It the case of the revenue that since there is no clear cut bifurcation in the balance sheet as to which are capital assets and which are stock in trade, therefore, the claim of the assessee that it was stock in trade and not capital asset is not acceptable. Further, the market value of the property for the purpose of stamp duty is Rs. 5,66,70,000/-. Since the asset is a capital asset the AO applied the provisions of section 50C and determined the capital gain at Rs.8,19,377/- which was subsequently rectified to Rs.5,12,19,377/-.

It is the case of the assessee that since the value of development rights was shown in the balance sheet under the head "current assets" and since AO in the wealth tax assessment order has excluded the land at Katraj from the purview of wealth tax, therefore, the development right shown in the balance sheet is in the nature of stock in trade and provisions of section 50C are not applicable.

CIT(A) deleted the addition made by the AO holding that the provisions of section 45(3) and section 50C would not arise in the case of the assessee.

During the course of search an amount of Rs 1,20,14,501 was found in the bed room of the assessee out of which cash amounting to Rs.1,20,00,000 was seized. Similarly, cash of Rs.2,36,500 was found at the business premises of the assessee, out of which an amount of Rs. 2 lakhs was seized. During the course of search action the statement of the assessee was recorded u/s.132(4) in which he had offered the unexplained cash of Rs.1.20 Crores as additional income for A.Y. 2007-08 over and above the regular business income. During the course of assessment proceedings the AO noted that the assessee has added the additional income of Rs.1,71,50,000 in the profit and loss account of Icon Towers which is the proprietary project of the assessee. The amount of Rs 1,71,50,000 includes Rs.1.20 Crores of voluntary declaration on account of unexplained cash, Rs.2 lakhs seized from the office premises of the assessee and voluntary disclosure of Rs.49,50,000 as unaccounted investment in Icon Towers. The assessee arrived at the net profit of Rs.1,40,20,504 in Icon Towers. The assessee has set off carry forward losses of earlier years against the net profit shown in Icon Towers. Since the carried forward business losses were more than the net profit, the assessee computed his tax liability at NIL. The AO, therefore, asked the assessee to explain as to why the amount of Rs.1,22,36,500 should not be treated as "income from other sources". The assessee in his submissions reproduced the statement recorded on 22-09-2006 and stated that on the basis of the said statement he had declared the additional income as "business income" for the A.Y. 2007- 08. It was contended that the assessee by saying in his statement recorded on 22-09-06 that "This is not my business cash" he meant that it was not cash as per his business books of accounts. It was further submitted that out of Rs.1.20 crores the assessee had explained the source of Rs.40 lakhs out of specific land dealings and only in respect of Rs.80 lakhs he could not recollect the source. It was submitted that the assessee in his statement has stated that the main source of income was business income only.

However, the AO was not satisfied with the explanation given by the assessee. According to the AO the onus is on the assessee to prove the source from which he had received the cash. Facts are within the special knowledge of the assessee. Therefore, if the assessee does not identify the source clearly the burden cannot be placed on the AO nor can it be presumed that the income was generated from the regular business of the assessee. Distinguishing the various decisions relied on by the assessee the AO came to the conclusion that the unexplained cash found at the residential as well as business premises amounting to Rs.1,22,36,500 has to be treated as "income from other sources". He accordingly denied the benefit of set off of carry forward business losses against such income from other sources for A.Y.2007-08.

CIT(A) held that the money found during the course of search and declared by the assessee for the impugned year has to be assessed under the head "business and profession" and not under the head "Other sources". While doing so, he further noted that the AO in the assessment order has analysed the cash found and seized on the basis of declaration made by the assessee to say that out of the total of approximately Rs.1.2 crores, Rs.40 lakhs admittedly has come for organising a land deal belonging to a firm in which the assessee is a partner with third party and therefore according to the AO the receipt of Rs. 40 lakhs is a premium which is required to be assessed under the head "other sources". According to the CIT(A) the word "premium" has been inappropriately used for this transaction as the land was not belonging to the assessee but was that of the partnership firm in which the assessee was a partner and therefore, money received for organising this deal can most appropriately be described as brokerage or commission or service charges. But the money definitely has been received due to land deal. According to the CIT(A) the AO has not analysed this issue in the assessment order as to why for the above reason such receipt would fall under the head "income from other sources".

So far as the remaining amount of Rs. 80 lakhs or so is concerned he observed that the assessee during the course of search as well as during the assessment proceedings in his statement had stated all through that the money represented income earned from business activities and the exact transactions which has resulted in accumulation of the unaccounted money was claimed to be not possible to be remembered. He opined that the AO has not acted correctly as per law. Referring to the various replies given by the assessee he noted that the assessee was all through claiming the amount to be received from business activities. He also analysed the provisions of section 56 and sub section (2) of section 56 and noted that unaccounted cash found is definitely not falling under any of the provisions of section 56. Referring to the decision of the Hon’ble Supreme Court in the case of Nalinikant Ambalal Mody Vs. Narayan Row reported in 61 ITR 428 he held that the cash so found cannot be treated as "income under other sources". Since the assessee undisputedly is engaged in the business of real estate, land dealings, running hotels and bakery etc. under individual capacity as well as through partnership firm, therefore, he was of the opinion that the cash so found normally and naturally would belong to such activities. He accordingly held that the money so found during the search and declared by the assessee for assessment has to be assessed under the head "business and profession" and not under the head "other sources".

Aggrieved with such order of the CIT(A) the revenue is in appeal before the ITAT.

Having heard the matter, held that,

++ applicability of section 50C on sale of stock - there is a merit in the arguments of the assessee. From the balance sheet of the assessee as on 31-03-2001, it is found that the assessee under the head "current assets, loans and advances" has shown the plots at Rs.2,02,93,041.97. In the schedule of plots, the plot at Katraj has been declared at Rs.1,46,000/-. The AO in the wealth tax assessment order for the A.Y. 2001-02 has not made any addition on account of the land at Katraj and the order was passed u/s.16(3) r.w.s. 17 of the Wealth Tax Act. Similarly, from the balance sheet for the year ending 31-03-2005, and for the year ending 31-03-2004 it is found that the plot of land at Katraj has been declared at Rs.1,46,000/- under the head "current heads’. Similarly in the personal balance sheet of the assessee the amount of Rs.16,25,000/- has been shown under plots or land account under current assets;

++ it has been held by the Allahabad High Court in the case of CIT Vs. Kan Construction colonizers Pvt. Ltd. that if an asset is held as stock in trade, the profit and gains from the sales is liable to be taxed as profit and gains from business and not as capital asset and section 50C has no application where transfer of immovable property is on account of sale of stock. There is no infirmity in the order of CIT(A) and accordingly the same was upheld;

++ search assessment - out of the amount of Rs.1.20 crores the assessee has already explained an amount of Rs.40 lakhs being the amount through land dealings which is unaccounted for. Therefore, the dispute is for the remaining Rs.80 lakhs. We find the assessee in his reply to Question No.15,16,21,27,28,30,31 and 32 had categorically stated that the additional income is from his business in land dealings etc. We, therefore, find merit in the finding given by the CIT(A) that the AO has not acted correctly as per law. The assessee in his statement during the search as well as assessment proceedings has categorically stated all through that the money found related to his unaccounted business income. Out of the above, he could explain the exact transaction which resulted into collection of Rs.40 lakhs as brokerage for the land deals organised by him and for the remaining amount he stated that the money has been collected over a period of time and the exact transactions cannot be identified. However, he has accepted the cash found as his additional unaccounted income and the above fact has also been noted by the AO in Para 3 of the assessment order;

++ so far as determining the additional income as income from other sources we find as per the provisions of section 56(1) income of every kind, which is not to be excluded from the total income under this act, shall be chargeable to Income tax under the head "income from other sources" if it is not chargeable to Income tax under any of the heads specified in section 14 item No. A to E. Further, provisions of section 56(2) gives the nature of income which shall be chargeable to tax under the head income from other sources;

++ in this case, the cash was found from the residential and business premises of the assessee. The assessee in his statement recorded u/s.132(4) has accepted the same as unaccounted business income and offered the same for taxation along with unexplained investment in Icon Tower. The declaration made u/s.132(4) for investment in Icon Tower was accepted without assigning any specific reason but the same was not accepted selectively for the cash found. Further, the declaration for taxability was accepted but the source of the cash found was not accepted. It has been held in a number of judicial decisions that statement recorded during the course of search u/s.132(4) has to be considered and accepted as a whole if the AO wants to use it as an evidence. The AO cannot be allowed to blow hot and cold simultaneously. The revenue could not be permitted to use that part of the statement which was beneficial to it and reject the other part of the statement which was detrimental to it. Therefore, the entire statement of the assessee has to be considered as a whole and the additional income so declared to be treated as business income as claimed by the assessee and held by CIT(A). Further, there is a merit in the submission of the assessee that when the assessee is undisputedly engaged in the business of real estate, land dealings, running of restaurants and bakeries etc. in individual capacity as well as through partnership firm for the last so many years, therefore, the cash found from residence as well as business premises would belong to such activities. Considering the totality of the facts of the case and in view of the detailed reasoning given by the CIT(A) while allowing the claim of the assessee that the money found during the search and declared by the assessee as additional income has to be assessed under the head "business and profession" and not under the head "income from other sources", there is no infirmity in his order. Accordingly, the same is upheld.

(See 2013-TIOL-557-ITAT-PUNE)