Venkatappaiah Naidu Vaddineni,, ... vs Assessee

2 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

2. The assessees herein are father and son. They along with Smt. Devasena w/o. Mr. Mahindra Vaddineni and their company M/s. Victory Alloys Steel Limited purchased land admeasuring ac.85.25gts between F.Y. 2000-01 and 2003-04 at Medchal for an aggregate consideration of Rs.2,35,36,015. The assessee's share out of above was ac.11.26 guntas which was purchased entirely in 2003-04. It was seen that the assessee along with three other land owners (assessee and his son Sri Mahindra Vaddineni & daguther-in- law Smt. Devasena) promoted a venture by the name of 'Fabel County' with an intention to develop the land into plots and towards this end they made suitable applications before the concerned Urban Development Authority. Land use conversion fee as well as lay-out fee, for conversion of the land from agricultural to residential use and also for getting the layout plan approved, was paid. Out of the total land holding of ac.85.28 guntas the total land developed was ac.63.10 guntas and 112. Sq. yards equivalent to 306242 sq. yds. As per the HUDA approved plan, the net plot area was 167802 sq. yds and the same was sold/ agreed to sale and the details are as under :

Land in Whom the land was sold to Sale Sq. yds consideration

60743 Victory Avenue P. Ltd., @ Rs.1800 Rs.10,93,55,600 per sq. yd

67563 (i) Sri V. Brahmananda Reddy Rs. 5,35,00,000 (20706 sq.yds). (ii) M/s. Lakshmi Venkateswara Estates P. Ltd., (26,879 sq. yds) (iii) Sri P. Srinivasa Sarma (19978 sq. yds) (iv) Other customers (834 sq. yds) 39496 Mortgaged to HUDA 3

ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

2.1. Survey operation under section 133A were conducted in the business premises of M/s. Victory Transformers and Switchgears Ltd., and group on 28.02.2008. During that it was found that assessees herein had derived gains by sale of lands which they admitted to tax later. Accordingly, assessees herein have filed return of income, admitting long term capital gains. A.O. has examined the claim and assessed the same by stating the same as under :

"2. Long Term Capital Gains derived from the sale of lands at Medchal : The assessee along with (i) Shri Mahindra Vaddineni, (ii) Smt.Devasena Vaddineni and (iii) M/s.Victory Alloy Steels Limited own lands admeasuring Ac. 85 - 28 Gts. located on the Medchal- Shamirpet road. The details of the ownership of the lands are as under :

SI. Name of the Person Extent of No. Ownership l. Shri Venkatappaiah Naidu Vaddineni, 13.21% Prop: Victory Enterprises. 2. Shri Mahindra Vaddieni 37.73% 3. Smt.Devasena Vaddineni 3.54% 4. M's.Vjctory Alloy Steels Limited (VASL) 45.52%

2.1. The aforesaid lands have been purchased during the period 2000-01 to 2003-04. During the previous years relevant to the assessment years 2007-08 and 2008-09, the assessee along with other co-owners sold a part of the aforesaid lands through one (i) Victory Avenues Private Limited (,VAPL' - a realty company) and to (ii) Shri P.Srinivas Vanna, Lakshmi Venkateswara Estates Private Limited & Shri V.Brahmananda Reddy (Vaishnavi Estates). The assessee offered capital gains chargeable to tax that fell to his share as under :-

Extent of Sale consideration Cost of Long term Land sold. received. (Rs.) acquisition & capital gain improvements derived (Rs.) (Rs.) 914 sq.yds. 74,08,316 17,98,985 56,09,331 4 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

2.2. In addition to the capital gain on the lands at Medchal, Mr. Mahendra has capital gain on sale of land at Dommara Pochampally village. The same was calculated and accepted by A.O. by observing as follows :

"3. Long Term Capital Gains derived from the sale of lands at Dommara Pochampally : The assessee along with Shri Manoj Vaddineni own lands ad measuring Ac. 6-24 Gts. located in Dommara Pochampally Village, Quthbullapur Mandal, Ranga Reddy District. The details of the ownership of the lands are as under :

Sl.No. Name of the Person Extent of Ownership. 1. Shri Mahindra Vaddineni 52.79% 2. Shri Majoj Vaddineni 47.21%

3.1. The aforesaid lands have been purchased in the year 1999 for a consideration of Rs.12,79.211/-, the cost per square yard is around Rs.75/-. The land was developed into plots totally admeasuring to 18000 sq. yds. The assessee along with Shri Manoj Vaddineni sold the above lands during the period 2004-05 to 2007-08 and admitted long term capital gains from such sale. In computing the long term capital gains chargeable to tax, the assessee claimed cost of improvements u/s.48(ii). However, the assessee furnished no supporting evidence in respect of the claim of cost of improvements.

Therefore, the assessee's claim of cost of improvements cannot be considered for allowance u/s.48(ii) and the long term capital gains chargeable to tax are recomputed as under:-

F.Yr. during Extent Sale Cost of Long term Assessee's which sold of land consideration acquisition capital gain share of sold (without capital indexation) gains.

2004-05 900 2,70,000 67,500 2,02,500 1,06,900 2005-06 12184 35,93,000 9,13,800 26,79,200 14,14,350 2006-07 3585 19,12,500 2,68,800 16,43,700 8,67,709 2007-08 0 0 0 0 0 Unsold 1331 0 0 0 0 Land Total 57,75,500 12,50,100 45,25,400 23,88,959 5 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

3. Ld. CIT, having noticed the assessment orders and documents, has issued notices under section 263 asking assessee why the capital gain should not be taxed as business income and why the gain on agreement with M/s Victory Avenues Ltd., (VAPL) should not be taxed entirely in the year under consideration as against the income offered to the extent of sales made by VAPL. Even though, Ld. CIT raised the issue of taxing the gains as business income on the sale of lands at Medchal, he, however, accepted that the same has to be taxed under the head "Long Term Capital Gains" only. To that extent, A.O. stand was accepted. However, on assessing the quantum of gains, the Ld. CIT directed as under :

"5. I have perused the detailed submission made by the assessee as well all documents on record. I am convinced that the land which was purchased between years 2000-01 to 2003-04 was a capital asset with an intention to hold on to the same. Mere application for change of land use shall not change the nature of the asset in the absence of any work carried out by the assessee to improve the land or to make such changes as would indicate that the assessee is now in the business of real estate. Hence, the assessment order u/s 143(3) r.w.s.147 dt.19.11.201O is found to be in order as far as the sale of 67563 sq. yds to Mr. V. Brahmananda Reddy and others for a consideration of Rs.5,35,00,000 is concerned. However, as mentioned earlier, there is a second limb to this land transaction. Vide agreement for sale-cum-GPA, the assessee and his group have sold 60742 sq. yds of land to a company incorporated with express purpose of developing the land, plotting the same and selling it to prospective buyers. This agreement for sale-cum-GPA was entered into with VAPL on 26.2.2007, wherein it is clearly mentioned that the possession for entire 60742 sq. yds of land has been handed over to the said concern i.e. VAPL. An amount of RS.50 lakhs has also been received as advance consideration while the balance has to be received over a period of time. The total consideration fixed for this plot of land is Rs.1800 per sq. yd. i.e. Rs.10,93,55,600. This transaction clearly falls within the ambit of transfer as defined under sec.2(47)(v) 6 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

of the I.T. Act, 1961. It is clear that 60745 sq. yds of land was sold to VAPL on a price which was determined in the agreement for sale-cum-GPA, possession was handed over to the buyer company and part of the consideration was received as advance. If the assessee was intending to trade in the plots of land proposed to be developed by VAPL, the assessee and his group would then have either kept the sales consideration flexible to take benefit of the natural appreciation in the price of land over the period of sale or in the alternate would receive part or whole consideration in the form of developed plots of land. However, the assessee as stated earlier, has on the date of agreement decided the consideration to be received which is Rs.1800 per sq. yd end hence the assessee has transferred his capital asset being his share in 60742 sq. yds of [end to VAPL. The assessee and his group has however offered surplus from sale of only 19574 sq. yds of land instead of the entire sales consideration for 60742 sq. yds of lend, The' Assessing Officer has accepted this computation of capital gains and hence his order is held to be erroneous in as much as it is prejudicial to the interests. of revenue. The assessment order dt.29.11.201O is hence set-aside with a direction to the Assessing Officer to compute the capital gains arising from sale of 60743 sq. yds of land to VAPL by holding that the capital gains on the entire parcel of land has arisen in AY 2007-08 and hence the entire sales consideration of Rs.10,93,55,600 should be brought to tax in AY 2007-08. In the case of the assessee, his proportionate share out of total sales consideration of Rs.10,93,55,600 should be adopted against which the cost of acquisition as determined by the Assessing Officer in his assessment order dt.29.11.2010 should be allowed.

3.1. In addition to the above common direction in both cases, Ld. CIT has directed that the gains on land by Mr. Mahendra should be considered as business income to the extent of gain in the year. His directions are as under :

"6. The assessee has also reflected long term capital gains on sale of land at Dommara Pochampally Village, Qutbullapur Mandal, Ranga Reddy District. The assessee along with his brother Sri V.Manoj purchased Ac. 6.24 guntas of land located at Dommara Pochampally Village, Qutbullapur Mandal, Ranga 7 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

Reddy District. The assessee's share out of the above land was 52.79%. The land was purchased in 1999 for a consideration of Rs.12,79,211. Subsequently, the assessee and his brother developed the land into plots which led to total developed plottable area of 18000 sq. yds. These plots have been sold by them during the period from 2004-05 to 2007-08. The assessee has admitted long term capital gains on such sale year-on- year.

6.1. It is seen that this land has been developed by the assessee and the co-owner who is his brother. The land has been demarcated into the plots and such saleable plots are being sold each year. This clearly shows that the assessee has treated this land as stock-in-trade, carried out business activity of developing it, demarcating it into plots and selling the same. Hence, the capital gains offered in respect of land at, Dommara Pochampally Village, Qutbullapur Mandal, Ranga Reddy District by the assessee should be treated as business income. As can be seen, the total sale consideration is Rs.19,12,500 and the cost of acquisition is Rs.2,68,800. The surplus generated is Rs.16,43,700, out of which the assessee's share works out to Rs.8,67,709. The Assessing Officer has treated this amount as long term capital gains whereas, as discussed above, this should be treated as business income. The Assessing Officer is directed to modify his order dt.29.11.201O and tax the surplus on sale of land at Dommara Pochampafly Village, Qutbullapur Mandal, Ranga Reddy District amounting to Rs.8,67,709, as business income."

4. Assessees are aggrieved and raised grounds. For the sake of record grounds raised by Mr. Mahindra are extracted hereunder :

1. "The order of the learned Commissioner of Income-Tax is erroneous both on facts and in law.

2. The learned Commissioner of Income-Tax erred in holding that there is any error in the order of assessment passed u/s 143(3) r.w.s. 147 of the I.T. Act by the Deputy Commissioner of Income-

Tax, Circ1e-3(3), Hyderabad. The learned 8 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

Commissioner of Income-Tax ought to have seen that there is neither an error nor any prejudice caused to the department so as to enable him to invoke the provisions of Sec.263 of the I.T. Act.

3. The learned Commissioner of Income-Tax erred in holding that there was under assessment of the sale consideration received during the year under consideration and further erred in directing the Assessing Officer to determine the sale consideration at Rs.10,93,55,600/-.

4. The learned Commissioner of Income-Tax erred in holding that the gain on sale of land at Dommara Pochampally Village, Quthbullapur Mandal, Ranga Reddy Dist., is assessable under the head "Business or Profession".

5. The learned Commissioner of Income-Tax ought to have seen that the Commissioner of Income-Tax (Appeals) after duly considering the facts on record arrived at the conclusion that the said gain is assessable under the head "Long Term Capital Gain".

6. The learned Commissioner of Income-Tax ought to have seen that the Assessing Officer took a conscious view of the matter and arrived at the conclusions and, therefore, the learned Commissioner of Income-Tax ought not to have revised the assessment.

7. Any other ground that may be urged at the time of hearing."

5. Ld. Counsel referring the order of A.O. purchase deeds, sale deeds and sale deeds cum GPA and agreement for sale cum GPA placed on record, submitted that the order of CIT cannot be justified. First of all, Ld. Counsel argues that the issues are examined by A.O. and accepted specifically in the order u/s.143(3) post survey operation u/s.133A. Hence, the opinion of Ld. CIT is change of opinion and higher authority cannot substitute his opinion in an order passed by A.O. after 9 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

due verification. He relied on various case law on the subject. Without prejudice to the same, it was submitted that assessee has entered into sale agreements and sale cum GPA agreements with various parties on which capital gain was offered entirely during the year. As far as capital gain on transaction with VAPL, which is subject matter of direction by CIT, it was submitted that it is not a sale agreement but an agreement for sale cum GPA. As far as the agreements with Mr. P. Srinivas Varma, V. Brahmananda Reddy and Laxmi Venkateswara Estates are concerned, the agreements specified that the possession was handed over and full consideration was received. Whereas, the agreement of sale cum GPA with VAPL is concerned, only Rs. 50 lakhs was received out of total consideration at Rs.10,93,55,600 and to the extent of area sold during the year parties offered capital gain at sale consideration of Rs.1800 per sq. feet. Ld. Counsel referred to the order in A.Y. 2008-09 wherein some more capital gain was offered and accepted by A.O. It was the submission that the agreement with VAPL is different in the sense that it only a GPA agreements with a condition that they will act as GPA holders for development and sale of plots and assessees receive consideration at Rs.1800 per sq.yrd. on the undeveloped plots. Ld. Counsel referred to the order of Ld. CIT(A) in A.Y. 2007-08 on cost of improvement and statements recorded in the course of survey to submit that the matters are examined thoroughly and so the order of CIT on merits is not correct. Coming to the issue of gains on Dommara Pochampally lands in the case of Mahindra, it was submitted that the stand of CIT is contradictory. It was submitted that the Ld. CIT accepted the gain under the head "Capital Gains" and such Medchal lands as capital assets but took a different stand on these lands that 10 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

too only in this year, whereas, as can be seen from the order of A.O. the gains arose in earlier years also and no gain in later year. Lastly, it was submitted that the gains having been offered at 20% in later year, CIT has not justified how the order of A.O. is prejudicial to the interest of Revenue, a condition to be satisfied along with erroneous in nature.

6. Ld. D.R. supported the order of Ld. CIT on this issue.

7. We have considered the rival contentions and perused the documents on record. As seen from the order of A.O. and statements recorded during the survey, the aspect of gains on sale of lands was thoroughly examined by A.O. Therefore, the prima facie objection that it is change of opinion by the Ld. CIT on the given set of facts has to be accepted as a valid one. A.O. not only accepted the capital gain but also denied cost of improvement in the order which was also confirmed by Ld. CIT(A). Therefore, order of CIT that income has to be treated as business income that too in this year only, ignoring the fact that in earlier two years similar incomes were quantified and accepted cannot be upheld. Therefore, the order of CIT on Dommara Pochampally gain in the hands of Mahindra has to be set aside.

8. Coming to the issues of bringing to tax the entire gain on agreement with VAPL, we are of the opinion that the stand of CIT cannot be supported. First of all, the agreement with VAPL is a GPA agreement without handing over possession. This stand gets support by the stamp duty paid and accepted by Registration authority. The agreement was registered as GPA agreement and not as a sale agreement.

11 ITA. No. 1034 & 1035/Hyd/2014 Mr. Venkatappaiah Naidu Vaddineni & Mr. Mahendra Vaddineni

Thus on facts the agreement cannot be considered as sale agreement so as to bring entire capital gain tax in the impugned year. Moreover, there was a statement from Manager of VAPL recorded by A.O. during survey which indicate that there were lot of unsold plots and detailed statement was recorded about sale of various plots and how the monies are accounted. This indicates that the said VAPL is only acting as an agent in sale of property and it did not acquire the property. Therefore, stand of CIT that the land/property in question was sale cannot be accepted. Lastly, the CIT himself accepted that gains on sale of Medchal land has to be assessed under the head "Long term capital gains". The gain is taxable at the rate of 20% only. Whether it is taxed in A.Y. 2007-08 or in later years, the tax rate is at 20% only. Thus, there is no prejudice caused to Revenue. Therefore, the twin conditions for invoking jurisdiction under section 263 have not been satisfied. For these reasons, we are of the opinion that the orders of CIT cannot be justified and so they are accordingly set aside.

9. In the result, assessees appeals are allowed.

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/- Copy to 1. Mr. Venkatappaiah Naidu, Mr. S. Rama Rao, Advocate, Vaddineni Flat No.102, Shriya's 2. Mr. Mahindra Vaddineni Elegance, H.No.3-6-643, Street No.9, Himayatnagar, Hyderabad - 500 029. 3. CIT-III, Hyderabad

5. Addl. Commissioner of Income Tax, Range-3, Hyderabad

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