S.R. Chauhan, (JM) - (1.) ITA Nos. 5687/Mum/2001 and 03/Mum/2002 are cross appeals by assessee and revenue respectively for assessment year 1998-99 and are directed against the order of CIT(A), Mumbai dated 31-10-2001.
(2.) We have heard the arguments of both the sides and have also perused the records. The relevant facts, in short, as ascertainable from the orders of authorities below and other records are that the assessee is a partnership firm, which came into existence on 3-8-1981, the partnership deed having been executed on 29-12-1981. The object of assessee-firm was to carry on business of construction of buildings, sale/purchase and development of land, effecting repairs and renewal to buildings and render allied service, etc., and such other business as may be mutually agreed upon by partners in terms of agreement dated 12-11-1981. The assessee-firm agreed to purchase a piece of land together with structures standing thereon admeasuring 15,000 sq. mts. lying and situated at Andheri Kurla Road, Mumbai, from the owner Miss G.D. Coomana for an aggregate consideration of Rs. 11 lakhs. The original owner executed the Deed of Confirmation on 28-6-1982 confirming the agreement for sale and it was registered with the Sub-Registrar of Assurances. The said property was reserved initially for recreation garden and a portion of the said property was encroached upon authorisedly. The property was also affected by the provisions of Urban Land (Ceiling and Regulation) Act, 1976. The physical possession of the said property since the date of its acquisition was with one M/s. Krishnakumar & Co. 3.1 The assessee-firm underwent various changes in its constitution from time to time. New partners were admitted, profit-sharing ratios were revised and some of the old partners retired. However, the terms and conditions of the partnership, as evidenced in subsequent deed dated 1-4-1993 and 30-12-1993, continued to be more or less similar to those contained in the original deed of partnership dated 29-12-1981. On 24-3-1994, another deed of partnership was executed clarifying that the activity of assessee-firm was only with respect to letting out of property. 3.2 The assessee took steps to obtain physical possession and paid Rs. 5 crores to M/s. Krishnakumar & Co. On receipt of the said amount, the deed of release was executed on 28-3-1994 whereby the said M/s. Krishnakumar & Co. relinquished all their right, title, interest and claim in the said property in favour of the appellant. One, Mr. Bashir Ahmed was also claiming ownership of the said property through adverse possession and this was also settled in terms Consent Terms dated 14-7-1997 filed in Suit No. 1250 of 1997 on payment of compensation of Rs. 1.08 crores. Payment of compensation of Rs. 90 lakhs to M/s. Lotus Trading Co. and M/s. G.K. Enterprises was also claimed to have been made to obtain the surrender of their tenancy rights. 3.3 The property in question was claimed as held and shown in the books of account as investment; and in Balance Sheet it was shown as an asset from the very beginning. In the revenue records, the said property was shown as held for agriculture use and absolutely no attempt was made by the appellant, after acquisition, to convert the same to a non-agriculture use. Subsequently, after quite sometime the appellant made efforts to clear all legal hurdles, perfect the title and sell the property in question. During the previous year relevant to assessment year 1988-99, the appellant agreed to sell the said property to M/s. Hotel Leela Venture Ltd. for an aggregate consideration of Rs. 56.20 crores by executing a memorandum of understanding dated 27-6-1997. The conveyance deed was executed on 19-1-1998 after obtaining clearances from the appellate authority. 3.4 The assessee filed the return of income for assessment year 1998-99, the year under appeal, declaring the transfer of the said property as its long-term capital asset, resulting in capital gains and returning taxable long-term capital gain of Rs. 25.93 crores after claiming various expenses, the indexed cost of acquisition and cost of improvement thereof. Order under section 143(3) was passed on 30-3-2000 determining the total income at Rs. 40.55 crores treating the transactions of purchase of land by the appellant on 12-11-1981 and its subsequent sale on 27-6-1997 as an adventure in the nature of trade and charging the gains arising therefrom under the head profits and gains of business or profession'. The assessing officer also disallowed the claim of compensation payments of Rs. 50 lakhs to M/s. Lotus Trading Co. and payment of Rs. 40 lakhs to M/s. G.K. Enterprises. In his assessment order the assessing officer placed reliance on original partnership deed dated 29-12-1981 as also on various deeds of reconstitution of partnership dated 1-4-1993 and 13-12-1993. Supplementary Partnership Deed dated 23-3-1994, purchase deed of Property dated 12-11-1981 and Release Deed dated 28-3-1994. 3.5 Aggrieved by assessing officer's assessment order, the assessee preferred appeal before CIT(A), who granted partial relief to the assessee by holding that the assessee acquired the land in question as an asset in the year 1981 constituting investment of the partnership firm and it was only in March, 1996, when the appellant made an application for commencement certificate and development permission, that the asset in question got converted into stock-in-trade. Therefore, the year ending 31-3-1996 is to be taken as the year in which the conversion of the asset into stock-in-trade took place. Under these circumstances, the assessing officer will have to compute the capital gain by working out the fair market value as on 31-3-1996. The difference between the sale consideration realized on 19-1-1998, amounting to Rs. 56.2 crores and the fair market value on 31-3-1996 as reduced by the admissible expenses (as already considered in assessment order) would constitute the Business Income. The learned CIT(A) also directed the assessing officer that for arriving at the FMV the assessing officer will take the inflation index of 281 as on 31-3-1996, with reference to the inflation index of 331 on sale price of Rs. 56.2 crores in assessment year 1998-99; and that the cost of acquisition and cost of improvement will have to be indexed for computing the capital gain in the year of conversion, i.e., assessment year 1996-97, which will suffer tax in the current year in view of the provisions of section 45(2) of the Income Tax Act, 1961. The learned CIT(A), thus, treated the land as investment till 25-3-1996 (the date on which application was made by assessee to BMC for IOD), conversion thereof into stock-in-trade on the said date. Hence, aggrieved by the impugned appellate order of learned CIT(A), both the assessee as well as revenue are in appeal before the Tribunal.
(3.) IN IT Appeal No. 5687/Mum/2001, the assessee has raised the following grounds of appeal before the Tribunal : 1. On the facts and circumstances of the case and in law, learned CIT(A) erred in holding that it was a case of conversion of investment into stock-in-trade on 25-3-1996 and erred in not appreciating that the transaction was purely a case of transfer of capital asset, 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the expenses incurred on development during the assessment years 1983-84 to 1993-94 amounting to Rs. 3,90,931 duly accounted for and reflected in the Balance Sheets on the respective dates. 3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the payments made to two tenants, viz., Lotus Trading Co. and G.K. Enterprises amounting to Rs. 50 lakhs and Rs. 40 lakhs respectively, towards compensation charges. The CIT(A) erred in not appreciating that it was a necessary cost to be incurred in order to hand over vacant possession of the property to the buyer. 4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in charging interest under sections 234A and 234B.;