Form No. J(2) IN HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax] ORIGINAL SIDE ITAT No. 105 of 2016 G.A. No 434 of 2016 PRINCIPAL COMMISSIONER OF INCOME TAX-3, KOLKATA VERSUS M/S. RUNGTA PROPERTIES PVT. LTD. BEFORE: Hon ble JUSTICE ANIRUDDHA BOSE -And- Hon ble JUSTICE ARINDAM SINHA Date : 8th May, 2017. For Appellant : Mr. Debasish Chaudhury, Adv. For Respondent : Mr. J.P. Khaitan, Senior Advocate Mr. P. Jhunjhunwala & Ms. S. Das, Court : This appeal by Revenue is against order of Income Tax Appellate C Bench passed on 29th April, 2015 dismissing Revenue s appeal in relation to assessment of assessee for three assessment years, being 2003-04, 2004-05 and 2006-07. Assailing Tribunal s decision, argument has been made on behalf of Revenue before us mainly on three counts. assessee had undertaken development of its immovable property on basis of agreement executed on 28th January 1994 and question has arisen in course of assessment as to whether such developmental activities would constitute adventure in nature of trade or not and profit from sale of flats constructed on such property would be treated as business income or it would be income from capital gains. This issue arises in respect of all three assessment years. second point, which arises in relation to assessment years 2004-05 and 2006-07 is on aspect of treatment of certain loans obtained by assessee from another incorporated company, Rungta Engineering Co. Pvt. Ltd. Both assessee and said engineering company at material time had common shareholder, 2 S.N. Rungta. He held more than 20% equity share capital in assessee and also more than 10% equity share capital in Rungta Engineering Company. In this perspective, Revenue wants to treat certain sums reflected in books of assessee as loan from Rungta Engineering as deemed dividend under Section 2(22)(e) of Income Tax Act, 1961. third point arises for assessment year 2006-07, and relates to treatment of loss of Rs.25,30,396/- arising from purchase and sale of shares suffered by assessee in corresponding financial year over trading in shares of one M/S. Sharang Viniyog Ltd. In assessment order, such loss has been referred to as loss on Penny Stock . assessing officer had disallowed claim of Rs. 25,30,396/- made by assessee for treating said sum as trading loss, finding purchase and sale of shares in that company to be colourable device to evade tax. assessing officer had directed same to be added to total income of assessee. assessing officer s findings on all three 3 counts were reversed by Commissioner of Income Tax in appeal, and findings of Commissioner were sustained by Tribunal. (2) Substantial argument has been advanced before us on point as to whether assessee s immovable property which was developed by it through another developer upon executing agreement would constitute adventure in nature of trade or income derived from such development would come for assessment as Long Term Capital gain. immovable property with which this appeal is concerned is situated at 206, A.J.C. Bose Road, Kolkata. Admitted position is that assessee had been holding immovable property since year 1965. In that year said property was purchased by assessee for sum of Rs.3,17,000/-. assessee had entered into agreement dated 28th January 1994 in relation to that property with another company, Right Address Ltd.(TRAL). said development agreement was followed by supplementary agreement dated 19th 4 February, 1997 and Memorandum of Understanding of 18th September, 2002. (3) arrangement between assessee and TRAL was that new structure was to come up in place of subsisting one at cost of developer and assessee was to get 49.29% of developed property along with undivided share of land in same proportion, rest going to developer, though initially agreement was that assessee s allocation would be 59% of Floor Area Ratio to be sanctioned by municipal authorities. assessing officer, treated gain on transactions from sale of flats as business income. Revenue s stand, as argued by Mr. Chaudhury, learned counsel is that such development arrangement was adventure in nature of trade and immovable property for relevant assessment years ought to be treated as stock in trade as it had changed its character subsequent to execution of development agreement. Mr. Chaudhury has sought to strengthen his 5 argument on this point by referring to existence of expression property in corporate name of assessee, Rungta Properties Pvt. Ltd. and its Memorandum of Association. One of objects of assessee contained in Memorandum of Association indicates that assessee could engage in development of immovable property. Mr. Chaudhury has defended assessment orders in which assessing officer had found transactions to be adventure in nature of trade and directed treating profit therefrom as taxable business income. He has referred to judgement of Supreme court in case of G. Venkataswami Naidu & Co. vs- Commissioner of Income Tax [(1959) 35 ITR 594] decision which assessee has also relied on in support of his submissions on this point. Mr. Chaudhury has further argued that no wealth tax was paid in respect of property, from which factor he wants us to deduce that same was to be treated as stock-in-trade. He has stressed on fact that property had undergone 6 substantial change. We find from decision of Tribunal in connection with appeal of Revenue for assessment year 2004-05 that assessee had shown capital gains of Rs.5,06,280/- on sale of fixed assets but assessing officer treated gain on transaction of Rs.6,30,74,240/-. (4) Mr. Khaitan, learned Senior Counsel appearing on behalf of assessee, on other hand submits that question raised on this issue required determination of factual issues and Tribunal as well as Commissioner of Income Tax, being fact finding bodies, had rightly come to conclusion that income derived from aforesaid transactions ought to be treated as long term capital gains. His contention is that this was gain from improvement of assessee s property which assessee held since 1965 and had all along shown in its books as fixed assets. He sought to highlight fact that assessee did not itself develop property and there was no finding on part of 7 assessing officer that assessee was involved in business of real estate at any point of time. (5) question as to whether profits from transaction of such nature would come within ambit of capital gains or income from business was examined by Supreme Court in case of G. Venkataswami Naidu & Co. vs. CIT [(1959) 35 ITR 594 (SC)]. In this judgement, certain factors were stipulated by Supreme court to be relevant for determining this question which would appear from following passages of judgement:- As we have already observed it is impossible to evolve any formula which can be applied in determining character of isolated transactions which come before courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such rule or formula. Generally 8 speaking, it would not be difficult to decide whether given transaction is adventure in nature of trade or not. It is cases on border line that cause difficulty. (i) If person invests money in land intending to hold it, enjoys its income for some time, and then sells it at profit, it would be clear case of capital accretion of realisation of investments consisting of purchase and resale, though profitable, are clearly outside domain of adventures in nature of trade. In deciding character of such transactions several factors are treated as relevant. (ii) Was purchaser trader and were purchase of commodity and its resale allied to his usual trade or business or incidental to 9 it? Affirmative answers to these questions may furnish relevant data for determining character of transaction. (iii) What is nature of commodity purchased and resold and in what quantity was it purchased and resold? If commodity purchased is generally subject matter of trade, and if it is purchased in very large quantities, it would tend to eliminate possibility of investment for personal use, possession or enjoyment. (iv) Did purchaser by any act subsequent to purchase improve quality of commodity purchased and thereby made it more readily resalable? What were incidents associated with purchase and resale? Were they similar to operations usually associated 10 with trade or business? Are transactions of purchase and sale repeated? (v) In regard to purchase of commodity and its subsequent possession by purchaser, does element of pride of possession come into picture? person may purchase piece of art, hold it for some time and if profitable offer is received may sell it. During time that purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such claim is upheld that would be factor against contention that transaction is in nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with character of transactions 11 alleged to be in nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. presence of all relevant circumstances mentioned in any of them may help court to draw similar inference; but it is not matter of merely counting number of facts and circumstances pro and con; what is important to consider is their distinctive character. In each case, it is total effect of all relevant factors and circumstances that determines character of transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce 12 any rule from them and mechanically apply it to facts before us. In this connection it would be relevant to refer to another test which is sometimes applied in determining character of transaction. Was purchase made with intention to resell it at profit? It is often said that transaction of purchase followed by resale can either be investment or adventure in nature of trade. There is no middle course and no half-way house. This statement may be broadly true; and so some judicial decisions apply test of initial intention to resell in distinguishing adventures in nature of trade from transactions of investment. Even in application of this test distinction will have to be made 13 between initial intention to resell at profit which is present but not dominant or sole; in other words, cases do often arise where purchaser may be willing and may intend to sell property purchased at profit, but he would also intend and be willing to hold and enjoy it if really high price is not offered. intention to resell may in such cases be coupled with intention to hold property. Cases may, however, arise where purchase has been made solely and exclusively with intention to resell at profit and purchaser has no intention of holding property for himself or otherwise enjoying or using it. presence of such intention I no doubt relevant factor and unless it 14 is offset by presence of other factors it would raise strong presumption that transaction is adventure in nature of trade. Even so, presumption is not conclusive; and it is conceivable that, on considering all facts and circumstances in case, court may, despite said initial intention, be inclined to hold that transaction was not adventure in nature of trade. (6) other authorities on which Mr. Khaitan has relied on are:- (i) CIT vs. P.K.N. Co. Ltd. (1966) 60 ITR 375 (SC); (ii) unreported judgement dated 17th November, 2015 of High court of Delhi in ITA 299/03 [Shanti Banerjee (deceased) vs. Deputy CIT]; 15 (iii) CIT vs. Razia Sulaiman (ITA No. 412 of 2007) decided by Karnataka High Court on 19th October 2011. (iv) CIT vs. Sohan Khan (2008) 304 ITR 194 (Raj); (v) CIT vs. Mohakampur Ice and cold Storage (2006) 281 ITR 354 (ALL). (vi) CIT vs. R.V. Gupta (2002) 258 ITR 261 (Del); In addition, Mr. Khaitan has brought to our attention order dated 30th March, 2009 of ITAT Bench I Mumbai in ITA No. 721/M/05 and ITA No. 4630/M/05 (CIT vs. Dhootapapeshwar Ltd), which Tribunal had relied upon in its decision which is under appeal before us. (7) We have considered ratios of these authorities and in our opinion, transactions which assessee had entered into could not come within ambit of adventure in nature of trade. We accept submission of Mr. Khaitan that determination of that question involves enquiry into facts and requires analysis 16 of agreement or arrangement between assessee and developing company. Other factors which Mr. Khaitan wants us to consider are that assessee caused improvement upon property and retained substantial portion of it for self-use. assessee s arrangement with developer was not joint venture agreement and there was no profit or loss sharing arrangement. ratio of decision in case of P.M. Mohammed Meerakhan [(1969) 73 ITR 375 (SC)] cited by Revenue does not apply on facts to case of assessee. There was clear intention of assessee in that case to undertake business venture and on that basis immovable property was treated to be stock-in-trade. In cases of R.V. Gupta (supra), Mohakampur Ice and Cold Storage (supra), intention to resell immovable assets was considered to be major factor to determine question of this nature, and length of time property was held by assessee was also considered by Court in each case to deal with questions raised 17 in those cases. On that yardstick, Commissioner and Tribunal rightly decided issue in favour of assessee in this appeal. In Razia Sulaiman (supra), fact that assessee was not in business of selling of sites or flats weighed in favour of assessee. In cases Sohan Khan (supra) and Shanti Banerjee (supra) same factors were applied to reject Revenue s contention that development of immovable properties with aid of builder and income generated from sale of flats of developed property per se would not render such income to be taxable as business income. So far as assessee in this appeal is concerned, no material has been brought to our notice that it had carried on business of property development. In absence of any evidence that assessee undertook business of property development, object clause in memorandum cannot be treated to be determining factor to conclude that this was part of assessee s regular business. On same reasoning, reference to property in 18 corporate name of assessee cannot make assessee property development company. Tribunal as well as Commissioner of Income Tax have concurrently found that gain of assessee from transactions of sale of flats did not constitute adventure in nature of trade. orders of assessing officer on same point for two other assessment years were also dismissed by Commissioner and Tribunal. We do not find any perversity in such finding and hence confirm such finding. (8) next point on which argument has been advanced before us is on deemed dividend. factual basis of in this appeal in relation to deemed dividend originates from sum of Rs.22,09,808/- which was shown in books of assessee for financial year 2003-04 as loan advanced to Rungta Engineering Company Private Limited. engineering company had paid Rs.25,00,000 within same financial year to assessee. At end of same financial year, there was 19 debit balance so far as engineering company is concerned in books of assessee. In this appeal, however, we are concerned with sum of Rs.2,37,450/- on which assessing officer has sought to charge income tax treating same as deemed dividend in hands of assessee. It appears that assessing officer had taken differential between sums received as loan by assessee and paid back to engineering company, being Rs.3,30,192/- and treated said sum as loan taken by assessee from engineering company. In books of engineering company, accumulated reserves and surplus on account of profits of business had been shown to be Rs.2,37,450/-. This is reason as to why said sum was sought to be taxed as deemed dividend by assessing officer. (9) Mr. Khaitan, has taken us through provisions Section 2(22)(e) of Act to contend that deemed dividend, if at all, is to be charged to income tax at 20 hands of common shareholder but not at hands of recipient of money unless recipient is also shareholder of company from whom amount has been received. It is not in dispute that S.N. Rungta is common shareholder in both companies and his holding exceeds 20% equity share capital in assessee and more than 10% equity capital in engineering company. To that extent, applicability of Section 2(22)(e) is not altogether precluded but question here is whether this amount can be taxed at hands of assessee as deemed dividend. Mr. Khaitan has referred to decision of Coordinate Bench of this Court in ITAT No. 74 of 2013 (Commissioner of Income Tax, Kol. III Vs. M/s. Baljit Securities Pvt. Limited) decided on 24th June, 2013. In this judgment, it has been held by Coordinate Bench that definition of dividend has been enlarged by legal fiction but in situation of this nature, it would be common shareholder who is to be taxed and not 21 recipient company. There are two other authorities, of Bombay High Court in case of Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd. reported in (2010) 324 ITR 263 (Bom.) and of Delhi High Court in case of Commissioner of Income Tax Vs. Ankitech Pvt. Ltd. [(2012) 340 ITR 14 (Delhi)] laying down this proposition or principle of Law. (10) Mr. Khaitan submits that three situations are conceived in Section 2(22)(e) of Act to expand meaning of term Dividend beyond what is normally understood. These are :- (i) Any payment by company by way of advance or loan to shareholder (holding not less than 10% shares); or (ii) to any concern in which such shareholder is member, or (iii) any payment on behalf of or for individual benefit of any such shareholder. He has also cited before us analysis of this provision made in case of Universal Medicare 22 Pvt. Ltd. (supra) and has contended, referring to his own break-up analysis made in respect of above referred provision that both in second and third situations payment is deemed to have been made to shareholder, though in second situation payment is made to concern of which such shareholder is member and in third case, payment is made either on behalf of or for individual benefit of shareholder. From this analysis, Mr. Khaitan wants us to hold that payment in this case is to be treated as payment to shareholder, if at all. When payment has been made to anyone which comes within second and third categories such payment shall be deemed to have been made to shareholder and payment shall take character of deemed dividend . person liable in such situations would be shareholder and not person or entity to whom money may has actually been paid in second and third situations. 23 On this point also we do not find any error committed by Commissioner or Tribunal to warrant our interference. (11) On last point, Tribunal held that Assessing Officer had not brought on records any material to show that transactions in shares of company involved were false or fictitious. It is finding of assessing officer that scrips of this company was executed by broker through cross deals and broker was suspended for some time. It is assessee s contention on other that even though there are allegations against broker, but for that reason alone assessee cannot be held liable. On this point Tribunal held As matter of fact AO doubted integrity of broker or manner in which broker operation as per statement of one of directors of broker firm and also AO observed that assessee had not 24 furnished any explanation in respect of intention of showing trading of shares only in three penny stocks. AO relied loss of Rs. 25,30, 396/- only on basis of information submitted by Stock fictitious. AO has also not doubted genuineness of documents placed on record by assessee. AO s observation and conclusion are merely based on information representative. Therefore on such basis no disallowance can be made and accordingly we find no infirmity in order of ld. CIT(A), who has rightly allowed claim of assessee. Thus ground No. 1 of revenue is dismissed. We agree with reasoning of Tribunal on this point also. We do not find any reason to interfere with 25 impugned order. suggested questions, in our opinion do not raise any substantial question of law. appeal is accordingly dismissed. (ANIRUDDHA BOSE, J.) (ARINDAM SINHA, J.) 26 Principal Commissioner of Income-tax-3, Kolkata v. Rungta Properties Pvt. Ltd