M/S.Hotel Kamal Private Ltd.,, ... vs Department Of Income Tax

ACIT, Circle 2(2) M/s. Hotel Kamal P. Ltd., Hyderabad. vs. Secunderabad-500003. PAN AABCH0409A (Appellant) (Respondent)

Cross Objection No.40/Hyd/2013 arising out of ITA.No.619/Hyd/2013 - Assessment Year 2007-2008

M/s. Hotel Kamal P. Ltd., ACIT, Circle 2(2) Secunderabad-500003. vs. Hyderabad. PAN AABCH0409A (Cross Objector) (Respondent)

For Revenue : Mr. D. Sudhakar Rao For Assessee : Mr. J.J. Varun

Date of Hearing : 19.11.2014 Date of Pronouncement : 02.01.2015

ORDER

PER B. RAMAKOTAIAH, A.M.

The appeal by Revenue and cross objection by assessee are against the order of Ld. CIT(A) dated 05.02.2013. Revenue has raised following grounds in its appeal.

2. "The CIT(A) erred on facts and in law in holding that the sale of property by the assessee is not "adventure in the nature of trade".

3. The CIT(A) erred on facts and in law in holding that even when the assessee had gains much more than 2 ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

business income within 3 months of acquisition property and its sale, the transaction is not "adventure in the nature of trade".

4. The CIT(A) erred on facts in law in holding that the asset is business asset despite that fact that the assessee never put the premises to business use and the premises was sold by him within 3 months after purchase.

5. The CIT(A) erred on facts and in law in appreciating the fact that the building purchased and sold by the assessee was meant for running software development units which is not the business of the assessee.

6. The CIT(A) erred on facts and in law in not appreciation the fact that the assessee purchased said property with view that realize capital gains as admittedly the assessee reduced interest burden by way sale of the property and in light of this the sale become "adventure in nature of trade".

1.1. The cross objection is on reopening the assessment under section 147 which is not pressed. We have heard Ld. Counsel and Ld. D.R. Ld. Counsel placed on record the documents of purchase, sale, company annual accounts and computation details filed with return of income.

2. There is only one issue in appeal and that relates to the treatment of profit on sale of property considered as business profits by AO. The facts are that the assessee is a company which is in the business of running restaurants and hotels. A search and seizure operation was conducted on the premises of assessee on 27.09.2006. In response to notice under section 153A assessee filed return of income and the relevant order under section 143(3) read with section 153A was passed on 31.12.2008. Subsequently, the assessment was reopened under section 147 of the Income Tax Act with 3 ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

the issue of notice under section 148 on 31.03.2011. The A.O. noticed that during the financial year relevant to the assessment year, assessee along with others had purchased a building with a built-up area of 77612 ft. for a consideration of Rs.21,51,99,517. Assessee's share in this property was 60% at a cost of Rs.12.95 crore. This property was shown in the fixed assets of the company and reflected in the relevant schedule. During the year, assessee sold fourth floor of the building with a super built-up area of 15522 ft. This was sold to M/s. Bharati Airtel for a consideration of Rs.11,87,43,300. The cost of the area sold according to assessee was Rs.4,41,13,524. Assessee reduced this cost of acquisition from the fixed assets and in the depreciation schedule, it claimed depreciation in respect of the balance of newly acquired asset. However in Income Tax Computation assessee reduced the sale consideration from the cost and claimed depreciation only on balance of cost. This was accepted in original assessment. However, A.O. in the reassessment proceedings held that the transaction of purchase of property and selling one floor of that property was in the nature of business being adventure in nature of trade.

3. During the course of appeal proceedings before the Ld CIT(A) assessee stated that it had purchased the entire building consisting of five floors and had used the building for business purpose. Initially, it had given the said floor on rent and the rent received had been declared in the income tax returns. Assessee is in the business of running restaurants. It took a contract for the supply of food and other materials to its tenant. The supply of food 4 ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

and its resultant revenues were also disclosed in the income tax returns. In order to repay a portion of the high interest loan one floor of the building was sold whereas the rest of the building continued to be used for business purpose. Assessee stated that it was never its intent to use the assets as stock in trade and selling a small portion of the asset to reduce interest burden was a valid financial planning which every business is supposed to do.

4. Ld. CIT(A) analysed the principles laid down by Hon'ble Supreme Court in the case of Mr. G. Venkataswami Naidu & Co. vs. CIT 35 ITR 594, decision of Hon'ble Bombay High Court in the case of Deepak Jyoti & Aarti Trust vs. CIT 284 ITR 453 and the Coordinate Bench of Hyderabad ITAT in the case of Om International in ITA.No.786 & 787/Hyd/2003 dated 08.09.2006. He concluded that :

"4.7. From the above ratios, it emerges that various facts including the nature of the business of the appellant, the nature of activity carried out pertaining to the asset, the line of business of assessee provide an indication to the intent of an assessee pertaining to the capital asset. It is this intent coupled with the nature of activity carried by an assessee which will determine whether the transaction can be classified as business or will rest within the four wails of transfer of capital asset."

4. Applying the above principle to the facts of case, Ld. CIT(A) allowed assessee contentions by stating as under :

"4.8. Coming to the facts of the case of the appellant, it is clear and that the appellant is in the business of running of restaurants and hotels. It is not in the business of trading in real estate. Further, a big building consisting of five floors was purchased. In this building the appellant also ran its business of supply of food and beverages which is its 5 ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

principal business. Moreover, the appellant did not make any renovation or improvements to the building which would attract a higher price in sale. The said building was also registered with the appropriate authorities and was provided with a VAT certificate of registration for the sale of food and beverages in the building. Even in the foreseeable future the building was not sold. Only one floor of the building was sold and the argument of the appellant that this was done for repaying a portion of the high interest bank loan appears to be valid. Such an act is a part of any good financial management whereby a business enterprise strives to lower its interest burden.

4.9. I find that the assessing officer has quoted the case pertaining to the Honourable Bombay High Court in 284 ITR 453 as I have also discussed above where the honourable court has clearly held that the fact that the property was sold within a short time by itself does not indicate that the transaction was in the nature of trade. It has also to be seen whether the transaction is isolated or forms a part of a series of transactions which indicate an adventure in the nature of great. Going by the very principles provided in the assessment order it is clear that this was only one small portion of an isolated transaction.

4.10. From the above facts and circumstances it is clear that it cannot be inferred from the only fact that one floor was sold within three months of the purchase of the entire building that the transaction was in the nature of trade. In fact as discussed above the intent of the appellant is very clear that the asset was purchased for business purpose and business was actually carried on in these premises. Therefore, I agree with the argument of the appellant that the transaction of purchase of building and the sale of only one floor of the building cannot be taken as a business transaction i.e adventure in the nature of trade. The appellant has rightly shown the assets as a capital asset and claimed depreciation on that. The assessing officer is directed accordingly. However, since the appellant has held the asset only for three months the. assessing officer is to allow depreciation keeping this period in view. The appellant gets relief accordingly."

6 ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

5. After considering rival contentions, we do not find any merit in revenue grounds. First of all, the property consisting of 5 floors was purchased by company along with the individuals who happened to be Director/share holder/family members. There is no dispute to the fact that the property is a commercial property in 'Infocity' developed by APIIC. The same was purchased for business purposes and used as such. It is also a fact that assessee sold 4th floor and accounted the gain as profit on sale of fixed assets in P & L account. However, in income tax computation, the gain is adjusted in the depreciation schedule as part of block of assets. Assessee added asset cost at Rs.12.95 crores and deleted Rs.11.87 crores in the block of assets thereby, claiming depreciation only on the balance amount. This working adopted by assessee in I.T. computation is in accordance with provisions of I.T. Act more particularly, sec.43(6). Thus, A.O. at the time of original assessment u/s. 153A consequent to search has accepted the same. There is no material to treat the transaction as 'adventure in nature of trade', after assessment was completed. Therefore, we uphold the order of CIT(A) and dismiss the revenue grounds.

6. In the result, appeal of Revenue and Cross Objections of assessee are dismissed.

Order pronounced in the open Court on 02.01.2015.

Sd/- Sd/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 02nd January, 2015

VBP/- 7

ITA.No.619/Hyd/2013 & CO.No.40/Hyd/2013 M/s. Hotel Kamal P. Ltd., Secunderabad.

Copy to

1. Asst. Commissioner of Income Tax, Circle 2(2), Hyderabad.

2. M/s. Hotel Kamal P. Ltd., 9-1-167/168, Sarojini Devi Road, Secunderabad - 500 003.

3. CIT(A)-III, Hyderabad

4. CIT-II, Hyderabad

5. D.R. ITAT "B" Bench, Hyderabad.