E.V. Mathai & Sons v. Dy. CIT

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The Tax Publishers2012 TaxPub(DT) 1103 (Coch-Trib) : (2012) 049 SOT 0479 INCOME TAX ACT, 19611 --Business income--ChargeabilityIncome from selling rubber estate--The assessee-firm purchased a rubber estate comprising an area of 436.60 acres, from one Mr. K and others of Madras at a cost of Rs. 408.07 lakhs in January 2004 incurring a further registration cost at Rs. 25.32 lakhs. The transaction was part-financed by the bank, i.e., for Rs. 170 lakhs. The assessee started selling this estate in pieces to different persons from February, 2004 onwards, selling 16.26 acres (to five persons) up to 31-3-2004, and another 384.72 acres (to 13 persons) during the financial year 2004-05, the relevant previous year. In the return of income for the year (filed by the assessee on 30-11-2005), it disclosed the income from the said sale as 'income from other sources', at Rs. 5216147, even as the surplus as per its calculation - given separately - worked to Rs. 6625844 and which stood transferred by it in its accounts to K Rubber Estate Reserve' A/c. Even though the assessee paid tax on the returned income it claimed a nil liability to tax on that account, claiming the sale to be an agricultural land (being located outside the 8 km. limit from the nearest municipality). The Assessing Officer (AO) found the assessee's proposition as strange The assessee could either prefer a claim (per its return) or not so. Once it declares an income, stating the basis on which it is arrived at, and pays tax thereon, the tax liability is admitted. As such, claiming the income to be exempt, on whatever ground, so that no tax liability inures, is contradictory. There could be no right to appeal in respect of the said claim. In other words, the assessee cannot blow hot and cold at the same time. As such, claiming the income as exempt, on account of the sale being of an agricultural land, by way of note appended to the return of income, was of no consequence. However, she also examined the assessee's case onmerits, in extenso. What the assessee had essentially engaged in is only an adventure in the nature of a trade; it, acquiring land in January 04 and selling the same from February, 2004 onwards in parts. The CIt(A) upheld the order of assessing officer. Held: Justified. The rubber estate under reference represents the assessee's stock- in- trade and not a fixed asset for its agricultural activities. First and foremost, is its financing. The same was part-financed by the bank. What was the project scheme submitted to it, and on which the loan was sanctioned and obtained! The same, arising only prior to the purchase, would exhibit the purpose and, consequently, the intention with which the acquisition was made, and on which its case hinges. It has, however, not been disclosed by the assessee at any stage. A plantation project report, for a term loan, earning a repayment stipulation matching the corresponding revenues (arising from the operation of the plantation project) over the project period, would definitely show it to be acquired for agricultural purposes. Non-disclosure would rather lead to the inference of it being a short term finance, only to enable purchase, to be liquidated soon thereafter on sale or otherwise. The admission by the assessee that the bank manager had gone 'out of his way' to sanction the loan, confirms this. No material in respect of bank loan, i.e., pertaining to its sanction, or its recall, has been placed on record. Why, even assuming so, a businessman would not shelve his project/activity, but seek alternative funding for the project. This, as in his considered view as a businessman/agriculturist, the project is viable and in fact in operation. In fact, this is a serious issue, as such premature withdrawal by the bank could lead to heavy and unwarranted losses, besides being impractical and even unfeasible in most cases. No responsible bank would do so, lead as it could to serious consequences for its business reputation, besides legal claim for repudiation of the contractual obligation/s [Para 4.4] The loan, as one see it, was only granted for a short period of time, as an accommodation loan to enable the assessee to acquire the property and realise the potential gains on his purchase/acquisition, the bargain price therefor, on account of the size of the holding, being very competitive. However, being in the realm of a 'speculative' trade involving no real economic activity, besides entailing and, therefore, deemed risky in comparison, the banks do not normally participate in such activity. This explains the urgency in repaying the loan and the subsequent immediate sale of the property. This also explains the 'out of the way' financing by the bank. That this is also the assessee's scheme of things gets established as fact by the mode, manner and timing of the sale. [Para 4.5] Firstly, the sale of the asset continues, i.e., beyond or even after the realization of funds thereby as sufficient to liquidate the bank liability (Rs. 170 lakhs plus interest of Rs. 11.56 lakhs). Why? If the purpose of the sale was only to neutralize the bank liability, to be discharged immediately for any reason, the assessee would stop sale as soon as the funds to that extent are realised, so that the inference of a trade would, if at all, be limited to holdings so sold. In fact, such a scheme is usually adopted by businessmen so as to fund the purchase/acquisition. This is as the same neutralizes the borrowing which enabled the acquisition of a larger interest/holding, bearing the advantage of a higher cake as well as a higher margin inasmuch as these are more competitively priced. [Para 4.5] Secondly, the sale, it is to be noted, starts in February 2004, i.e., immediately after the purchase is completed. Now, the rubber estate is not something for which there is an open, ready market which could be tapped at will. Buying and selling estate, and of such size, requires negotiations and is at times protracted. In other words, the sale in February, 2004. is only the result of effect of efforts towards sale, made in anticipation, even prior thereto. Hoardings, newspaper advertisements, word of mouth, etc., to the effect that a part asset is up for sale, for it to attract buyers, and which requires some gestation period to yield results. Further, Tribunal emphasise on the 'timing' as the same reveals the nature of the purchase, which is crucial in the present case. [Para 4.5] The third is the manner of the sale, i.e., in lots. The assessee explains this to be only on account of no buyers for the estate (on account of its size) coming forward, while it was hard-pressed for time due to the pressure by the bank. What is the evidence? The matter of bank pressure stands already discussed, and which is applicable, firstly only to a part of the holding, and would further only lead to the inference of which being - to that extent - a venture in the nature of trade. As regards its explanation, the same is only understandable, if it was making serious efforts to sell the estate, i.e., were made, and on the same proving futile, sale in parts was mooted. Here, we find the sale in small pieces right from the first day. In fact, as noted earlier, only interested buyers, i.e., for what is up for sale, would approach the assessee. In other words, had the assessee spread the word that its entire (or even a substantial part) estate was on sale, it would not be approached by the buyer for a fragment of the holding viz. 1.9 acres, 5.39 acres, 6.86 acres. 2.11 acres and 15.90 acres (which represents 5 sale transactions) during February to March 2004. i.e., from marginal buyers, and from the very beginning. The same, in fact, represents systematic selling, even as found by the Commissioner (Appeals). The land parcels sold are not contiguous. As such, sale in lots breaks the contiguity of land, which is one of the main if not an essential attribute for acquiring large holdings. In other words, the assessee could not have proceeded to sell in lots unless he is sure, from day one that he intends to sell the estate in that manner. The absence of large buyers is understandable where the sale has taken place in two or three lots, each representing large sized holding, while in the instant case the holding sold is for an average of 22.278 acres of land (401 acres/18 buyers). Why, a larger holding, which would be more profitable on account of economy of scale, i.e., in comparison to a much smaller holdings, not attract any buyer? The same, besides being unevidenced, is incomprehensible. Fourth, is the increase in the price. The assessee has fetched an overall price increase of around 42% (apprx. Rs. 436.60 lakhs), While selling 400.98 acres at (Rs. 531.74 lakhs) in a matter of a year. In fact, almost immediately, considering that 32.16 acres stood sold for Rs. 39.54 lakhs during February-March, 2004. How could this be? The only reason that can be ascribed thereto is the plotting, i.e., selling in much lower sizes, for which payment, on account of increased accessibility, is that much more. [Para 4.5] The assessee's argument that it has incurred expenditure to the tune of Rs. 35.74 lakhs on the upkeep and maintenance is of no moment in view of the finding by the Commissioner (Appeals) that the plantation activity was extended to a very small area, the assessee reporting a profit of Rs. 2.59 lakhs. In fact, the arguments runs counter to the fact of continued sale of land from Feb., 2004 onwards. The assessee could not possibly upkeep the plantation for its own sake and then sell it, i.e., upkeep expenditure was only towards facilitating the sale and has been rightly taken as business expenditure by the assessing officer, even as a small part of it was, as would indeed be, towards agricultural activity. In fact, a good part of the same (Rs. 3.377 lakhs), Tribunal observe to be on account of primary expenditure (Rs. 1.25 lakhs), which obviously can be on the upkeep activity. [Para 4.6] Both in terms of intention and action, the transaction of puchase and sale of rubber estate represents a business activity and, thus, stands rightly assessed as business income udner section 28(i). [Para 4.8] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1103 (Coch-Trib) : (2012) 049 SOT 0479

INCOME TAX ACT, 19611

--Business income--ChargeabilityIncome from selling rubber estate--The assessee-firm purchased a rubber estate comprising an area of 436.60 acres, from one Mr. K and others of Madras at a cost of Rs. 408.07 lakhs in January 2004 incurring a further registration cost at Rs. 25.32 lakhs. The transaction was part-financed by the bank, i.e., for Rs. 170 lakhs. The assessee started selling this estate in pieces to different persons from February, 2004 onwards, selling 16.26 acres (to five persons) up to 31-3-2004, and another 384.72 acres (to 13 persons) during the financial year 2004-05, the relevant previous year. In the return of income for the year (filed by the assessee on 30-11-2005), it disclosed the income from the said sale as 'income from other sources', at Rs. 5216147, even as the surplus as per its calculation - given separately - worked to Rs. 6625844 and which stood transferred by it in its accounts to K Rubber Estate Reserve' A/c. Even though the assessee paid tax on the returned income it claimed a nil liability to tax on that account, claiming the sale to be an agricultural land (being located outside the 8 km. limit from the nearest municipality). The Assessing Officer (AO) found the assessee's proposition as strange The assessee could either prefer a claim (per its return) or not so. Once it declares an income, stating the basis on which it is arrived at, and pays tax thereon, the tax liability is admitted. As such, claiming the income to be exempt, on whatever ground, so that no tax liability inures, is contradictory. There could be no right to appeal in respect of the said claim. In other words, the assessee cannot blow hot and cold at the same time. As such, claiming the income as exempt, on account of the sale being of an agricultural land, by way of note appended to the return of income, was of no consequence. However, she also examined the assessee's case onmerits, in extenso. What the assessee had essentially engaged in is only an adventure in the nature of a trade; it, acquiring land in January 04 and selling the same from February, 2004 onwards in parts. The CIt(A) upheld the order of assessing officer. Held: Justified.

The rubber estate under reference represents the assessee's stock- in- trade and not a fixed asset for its agricultural activities. First and foremost, is its financing. The same was part-financed by the bank. What was the project scheme submitted to it, and on which the loan was sanctioned and obtained! The same, arising only prior to the purchase, would exhibit the purpose and, consequently, the intention with which the acquisition was made, and on which its case hinges. It has, however, not been disclosed by the assessee at any stage. A plantation project report, for a term loan, earning a repayment stipulation matching the corresponding revenues (arising from the operation of the plantation project) over the project period, would definitely show it to be acquired for agricultural purposes. Non-disclosure would rather lead to the inference of it being a short term finance, only to enable purchase, to be liquidated soon thereafter on sale or otherwise. The admission by the assessee that the bank manager had gone 'out of his way' to sanction the loan, confirms this. No material in respect of bank loan, i.e., pertaining to its sanction, or its recall, has been placed on record. Why, even assuming so, a businessman would not shelve his project/activity, but seek alternative funding for the project. This, as in his considered view as a businessman/agriculturist, the project is viable and in fact in operation. In fact, this is a serious issue, as such premature withdrawal by the bank could lead to heavy and unwarranted losses, besides being impractical and even unfeasible in most cases. No responsible bank would do so, lead as it could to serious consequences for its business reputation, besides legal claim for repudiation of the contractual obligation/s [Para 4.4] The loan, as one see it, was only granted for a short period of time, as an accommodation loan to enable the assessee to acquire the property and realise the potential gains on his purchase/acquisition, the bargain price therefor, on account of the size of the holding, being very competitive. However, being in the realm of a 'speculative' trade involving no real economic activity, besides entailing and, therefore, deemed risky in comparison, the banks do not normally participate in such activity. This explains the urgency in repaying the loan and the subsequent immediate sale of the property. This also explains the 'out of the way' financing by the bank. That this is also the assessee's scheme of things gets established as fact by the mode, manner and timing of the sale. [Para 4.5] Firstly, the sale of the asset continues, i.e., beyond or even after the realization of funds thereby as sufficient to liquidate the bank liability (Rs. 170 lakhs plus interest of Rs. 11.56 lakhs). Why? If the purpose of the sale was only to neutralize the bank liability, to be discharged immediately for any reason, the assessee would stop sale as soon as the funds to that extent are realised, so that the inference of a trade would, if at all, be limited to holdings so sold. In fact, such a scheme is usually adopted by businessmen so as to fund the purchase/acquisition. This is as the same neutralizes the borrowing which enabled the acquisition of a larger interest/holding, bearing the advantage of a higher cake as well as a higher margin inasmuch as these are more competitively priced. [Para 4.5] Secondly, the sale, it is to be noted, starts in February 2004, i.e., immediately after the purchase is completed. Now, the rubber estate is not something for which there is an open, ready market which could be tapped at will. Buying and selling estate, and of such size, requires negotiations and is at times protracted. In other words, the sale in February, 2004. is only the result of effect of efforts towards sale, made in anticipation, even prior thereto. Hoardings, newspaper advertisements, word of mouth, etc., to the effect that a part asset is up for sale, for it to attract buyers, and which requires some gestation period to yield results. Further, Tribunal emphasise on the 'timing' as the same reveals the nature of the purchase, which is crucial in the present case. [Para 4.5] The third is the manner of the sale, i.e., in lots. The assessee explains this to be only on account of no buyers for the estate (on account of its size) coming forward, while it was hard-pressed for time due to the pressure by the bank. What is the evidence? The matter of bank pressure stands already discussed, and which is applicable, firstly only to a part of the holding, and would further only lead to the inference of which being - to that extent - a venture in the nature of trade. As regards its explanation, the same is only understandable, if it was making serious efforts to sell the estate, i.e., were made, and on the same proving futile, sale in parts was mooted. Here, we find the sale in small pieces right from the first day. In fact, as noted earlier, only interested buyers, i.e., for what is up for sale, would approach the assessee. In other words, had the assessee spread the word that its entire (or even a substantial part) estate was on sale, it would not be approached by the buyer for a fragment of the holding viz. 1.9 acres, 5.39 acres, 6.86 acres. 2.11 acres and 15.90 acres (which represents 5 sale transactions) during February to March 2004. i.e., from marginal buyers, and from the very beginning. The same, in fact, represents systematic selling, even as found by the Commissioner (Appeals). The land parcels sold are not contiguous. As such, sale in lots breaks the contiguity of land, which is one of the main if not an essential attribute for acquiring large holdings. In other words, the assessee could not have proceeded to sell in lots unless he is sure, from day one that he intends to sell the estate in that manner. The absence of large buyers is understandable where the sale has taken place in two or three lots, each representing large sized holding, while in the instant case the holding sold is for an average of 22.278 acres of land (401 acres/18 buyers). Why, a larger holding, which would be more profitable on account of economy of scale, i.e., in comparison to a much smaller holdings, not attract any buyer? The same, besides being unevidenced, is incomprehensible. Fourth, is the increase in the price. The assessee has fetched an overall price increase of around 42% (apprx. Rs. 436.60 lakhs), While selling 400.98 acres at (Rs. 531.74 lakhs) in a matter of a year. In fact, almost immediately, considering that 32.16 acres stood sold for Rs. 39.54 lakhs during February-March, 2004. How could this be? The only reason that can be ascribed thereto is the plotting, i.e., selling in much lower sizes, for which payment, on account of increased accessibility, is that much more. [Para 4.5] The assessee's argument that it has incurred expenditure to the tune of Rs. 35.74 lakhs on the upkeep and maintenance is of no moment in view of the finding by the Commissioner (Appeals) that the plantation activity was extended to a very small area, the assessee reporting a profit of Rs. 2.59 lakhs. In fact, the arguments runs counter to the fact of continued sale of land from Feb., 2004 onwards. The assessee could not possibly upkeep the plantation for its own sake and then sell it, i.e., upkeep expenditure was only towards facilitating the sale and has been rightly taken as business expenditure by the assessing officer, even as a small part of it was, as would indeed be, towards agricultural activity. In fact, a good part of the same (Rs. 3.377 lakhs), Tribunal observe to be on account of primary expenditure (Rs. 1.25 lakhs), which obviously can be on the upkeep activity. [Para 4.6] Both in terms of intention and action, the transaction of puchase and sale of rubber estate represents a business activity and, thus, stands rightly assessed as business income udner section 28(i). [Para 4.8]