1. This is an appeal filed by the assessee against the order dated 26/10/98 of CIT(A)-IX, New Delhi pertaining to 1992-93 assessment year.
"1. The appeal order is against the facts of the case and bad in law.
2. The CIT(Appeal) has erred to treat the gain on sale of investment of Rs. 95,772/- as business income.
3. The CIT(Appeal) has erred in disallow the deduction Under Section 48 of the Income Tax Act for Rs. 55,386/-.
4. The CIT(Appeals) has erred to sustain invoking the provisions of Section 145 of Income Tax Act to treat the investment as Stock-in-Trade.
5. The CIT(Appeals) has erred by not dealing to ground No. 5 regarding disallowance of interest of Rs. 6,979/- out of cost of investment which was incurred during A.Y. : 1986-87 & duly assessed in that year.
6. The CIT(Appeals) has erred to sustain additions on the basis of apprehension." 3. Right at the outset, it was submitted by the learned AR of the assessee that ground No. 5 is not pressed by the assessee. As such, the grounds which remain for adjudication are ground Nos. 2, 3 & 4 in view of the fact that ground Nos. 1 & 6 are general in nature.
4. The relevant facts of the case pertaining to ground Nos. 2, 4 & 6 are that the assessee in the year under consideration derived income from rent, bank interest and from sale of space in Devika Tower. Devika Tower is a building constructed by Pragati Construction Co., a sister concern of the assessee's firm. The assessee filed its return showing an income of Rs. 22,650/-. The assessee has shown its income from sale of space in Devika Tower as a capital gain. The AO, however, treated the same as a business income. The relevant facts as recorded in the assessment order are:- "The assessee firm is a builder and had constructed Pragati Tower at 26, Rajindera Place, New Delhi. The said building was sold on flat basis. In the meanwhile in the previous year relevant to assessment year 81-82 the assessee firm invested Rs. 17.50 lacs to procure space measuring 7000 sq.ft. in the basement of Devikar Tower, Nehru Place, New Delhi. The said space consisted of ready made flats of which possession was given to the firm on 11.11.85. Since then the firm has been selling the space in parts. 500 Sq.ft. of area was sold on 31.10.86, 1646 sq.ft. area was sold on 21.10.87, 2100 sq.ft.
space was sold in the previous year relevant to A.Y. 89-90, 1904 sq.ft. of space was sold on 31.3.91 and the remaining 850 sq.ft. of space was sold during the previous year relevant to the assessment year under consideration i.e. A.Y. 92-93.
It is very clear from the history of the assessee firm that it is a dealer in real estate. Vide order sheet entry dated 6.8.93 the assessee was asked to comment upon the nature of its business. In its reply dated 23.8.93 the assessee firm admitted "The nature of business of the assessee is from sale of flats". Thus when the sale of space in Devika Tower should have been treated as business income but the assessee has treated it as long term capital gain and has claimed deduction Under Section 148(2).
Vide order-sheet entry dated 23.8.93 the assessee was asked to explain why the investment in the space of Devika Tower should not be treated as stock-in-trade and thus why any income from sale of the said space should not be treated as business income. In his reply dated 6.9.93 the learned counsel of the assessee has stated:- "The possession of the space was given to the firm during A.Y. 1986-87 and since then the firm has treated the amount as investment in its balance sheet. The space was considered by firm as capital asset. The space was given on rent and an income in the nature of income from house property was also returned.
As the amount has been considered and assessed as capital gain, the amount cannot be considered as stock-in-trade on account of following:- 1. Since A.Y. 1986-87 the amount has been treated in the balance sheet as investment viz-capital asset.
3. The amount invested was not in the nature of trade or for revenue purposes but a heading against inflation.
On account of above when an intention of the assessee has been accepted and books of accounts of the assessee accepted there can be no occasions to change the character of assets provided assessee himself does it." He has also stated that for A.Y. 1987-88 short term capital gain on sale of property has been assessed as such. Subsequently in his letter dated 29.9.93 the learned counsel has stated that as per the partnership deed the firm came into existence only for one project and it has to cease its business on completion of all formalities.
In this regard assessee's contention is not acceptable because of the following reasons:- 1. It is clear from the history of the case that the assessee firm has been dealing in real estate business from the very beginning.
Assessee itself has admitted that the business is sale of flats.
Therefore any profit from sale of space has to be treated as business income.
2. Assessee's claim that "the amount invested was not in the nature of trade or for revenue purposes but a hedging against inflation" is not acceptable because within a year after getting possession it started selling the space in parts. Thus the purpose of purchase of space was to later sell it for a profit. In deciding whether it was a business activity or not, one has to go by the intention behind the whole transaction. The intention has to be judged by actions as well as the history. In this case both action and history indicate that intention of purchase of space was to trade in it.
3. The fact that the space was given on rent does not make any difference because that was just a stop gap arrangement and the ultimate objective was to sell the space.
4. In computing the income it is not relevant how a particular asset has been shown in the balance sheet. Stock-in-trade cannot be treated as capital asset merely because it has been shown as capital asset in the balance sheet.
5. Assessee's claim that "any sale of this space has been assessed as capital gain" is also not correct. Between A.Y. 1986-87 and A.Y. 1991-92 assessee's case has been scrutinized only twice in A.Y. 1987-88 and A.Y. 1990-91. In A.Y. 90-91 there was no sale of the said space so this question did not arise. In the previous year relevant to A.Y. 1987-88 500 sq.ft. of area was sold. Profit from the sale of this space was shown as short term capital gain and was assessed as such. However, important thing to be noted here is that since it was declared as short term capital gain, no deduction Under Section 48(2) was claimed. Hence its treatment as short term capital gain or as business income was irrelevant for computation of total income. Moreover, assessment of each year is independent. It is not incumbent upon the present A.O. to accept mistakes of the past.
Rather it is his duty to put the things in right perspective, rectify earlier mistakes and reject earlier system is found to be such that it does not reflect true and correct income of the assessee. In the case of CIT v. British Pains (I) Ltd. (188 ITR 44 S.C.) The Supreme Court has held that "it is not only the right, but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deducted therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in earlier years." 6. Assessee's argument that as per partnership deed the firm came into existence only for one project i.e. Pragati Tower and any other activity was not in the nature of trade, is also not valid because intentions are more important than what is written in partnership deed. The fact that the assessee has indulged in trading of space in Devika Tower itself shows that terms and conditions of the partnership deed have been violated.
In view of the points cited above provision of Section 145 are being involved and the investment in the space in Devika Tower is to be treated as stock-in-trade and profit from sale of the said space is to be treated as business income." 5. In appeal before the first appellate authority, the submissions made on behalf of the assessee were as under:- "The learned A.R. of the assessee submitted on the other hand that the assessee had got the property during A/Y 1981-82, construction completed during 1985-86 which was sold after a gap of 6-7 years during assessment years 1987-88, 88-89 and 91-92 and capital gain was returned in the income and purchases were only considered as investment in past assessments. The assessee has earned income from these investments from A/Y 87-88 till 1992-93 to the extent of Rs. 10,62,934/-. The assessee has not put any money in investment thereafter i.e. 1981-82. The treatment of A.O. to convert the investment in stock in trade was not justified. This was a case in which commodity purchased and sold is not ordinarily commercial, in the manner of dealing with the commodity does not stamp the transaction as a trading venture. Further, the A.R. submitted that rental income was generated through out to the warrant the inference that it was yielding income as such it was being dealt with as capital investment. A trader may acquire a commodity in which he is dealing for his own purpose and hold it apart from stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business, in each case the question is one of the intentions to be gathered from the evidences of conduct by the acquirer and his dealings with the commodity. The assessee relied upon the judgment of D.L.F. Housing and Construction (P) Ltd. v. CIT 141 ITR 606 (Delhi High Court) and CIT v. Madan Gopal Radhey Lal 73 ITR 652 (Supreme Court). The A.R. further submitted that invoking of Section 145 of the Income tax is totally illegal on the fact that Section 145 deals with system of accounts which is either cash or mercantile. The assessee has followed mercantile system consistently and there is no change. Whether the particular asset has been depicted as an investment or stock-in-trade has nothing to do with the system of accounts." 6. The above submissions were not accepted by him and the action of the AO was confirmed. Still aggrieved, the assessee is in appeal before us.
The submissions made before the tax authorities were reiterated at length. Referring to pages 17 & 18 of the paper book filed before us, it was pointed out that it was not a partnership at will and in fact it is observed:- "AND WHEREAS the parties of first and second parts have approached the party of third part to enter into partnership for constructing building and sale of this very Project in joint venture known as PRAGATI TOWER to which the party of third part has agreed on certain terms and conditions.
NOW, THEREFORE, it is deemed expedient to reduce the understanding arrived at between parties hereto into writing and therefore this Deed of Joint Venture witnesseth as under:- 1. That this joint venture agreement would be deemed to be effective from 1.9.1977 and would conclude on completion of the Project after effecting sale and complying all formalities in regard thereto.
7. Attention was also invited to page 19 of the paper book which is page 3 of the partnership deed. Paragraph 12 of the same was highlighted which reads as under:- "12. The partnership is for definite tenure to last till the completion of project as mentioned hereinabove." 8. Attention was invited to 172 ITR 84 (Patna) and 73 ITR 652 (SC).
Inviting attention to the partnership deed and balance sheet, it was contended that right from 1981-82, it has been shown as an investment.
Attention was also invited to 91 ITR 80 for the proposition that accounting entry is an extremely important piece of evidence. Attention was also invited to Arjun Kapur's case reported in 70 ITD 161 at page 164. It was also contended that there is no new fact to come to the conclusion that there is a difference in the preceding assessment year.
It is the same property and the same assessee. Attention was invited to 141 ITR 817. Reliance was placed upon 193 -ITR -321.
9. Learned DR, on the other hand, heavily relying on the assessment order and the CIT(A)'s order contended that the arguments of the assessee did not have any force in view of the fact that where is the question of investment when as per the assessee himself the assessee has sold from year to year right from the year the property was purchased. It was further contended that just because capital gains have been accepted in the earlier years, then this fact by itself is not relevant as the AO at page 3 paragraph 5 has given specific reason for disagreeing with the assessee's version. It was argued that the AO has in fact relied upon British Paints - 188 ITR 44 (SC) specifically for the proposition :- "It is not only the right, but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deducted therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in earlier years." 10. With reference to the earlier years, it was argued that the AO could not predict the future intentions of the assessee right in the first year and simply because in the beginning the version of the assessee had been accepted, it does not tantamount to precluding the AO from ascertaining the correct facts and circumstances from the continuous actions of the assessee. It was argued merely because the assessee has shown it as an investment in his balance sheet, this fact also is not sufficient ground to bar the AO to lift the veil and see exactly what the activity and the nature of assessee's enterprise is.
The fact that there is rental income or not it was argued how does it affect the assessee's claim as the fact whether a certain income falls under which head can be determined only on the specific facts of a particular year. Attention was also invited to 262 ITR 517 (Kar).
Inviting attention to the impugned order at page 3, it was pointed out that in order to ascertain the fact whether an activity as an investment or a trade, the AO would be necessarily be required to see the past conduct to determine the fact and if the AO has done this exercise which he is duty bound to perform as Courts have consistently held, then simply because in the earlier years the stand of the assessee has been accepted is no reason why the authorities could not question and look into the action. It was further argued that it is not as though the AO has acted hastily and without assigning any reason, the AO, it was argued has given sufficient opportunity and hearing before concluding. Relying upon the same, it was argued, he concluded the intention of the assessee clearly brings out the fact that it is consistently being sold every year in the face of such categorical evidence to rely upon some decision given in a different context would hardly advance the case of the assessee. With reference to the attention invited to the partnership deed, it was contended that they do not advance the case of the assessee and even otherwise, it is argued that it is a partnership at will even then no material help is rendered to the assessee. So, relying on the partnership deed will not help even a single transaction is enough to show the intention.
11. The learned AR in reply on the other hand, contended that the assessee has specifically been constituted for the specific purpose and, as such, he could not do any other business and, in fact, the investment made by the assessee is unlocked in a phased manner, attention was invited to 172 Taxman 62 (P&H).
12. We have heard the rival submissions and perused the material placed on our files and taken note of the decisions relied upon. After a perusal of the legal propositions in the decisions cited, it could be safely concluded that although the recording of entries in the books of accounts is an important piece of evidence but this piece of evidence is not by itself conclusive in case facts or circumstances over a period of time belie them. After a careful perusal of the settled position, there is no doubt over the issue that the AO is duty bound and required to examine the past history and facts in order to ascertain authenticity of the assessee's claim. The fact that after an appraisal of chain of events or facts the AO takes a stand contrary to the consistent stand declared by the assessee and accepted by the Revenue, the AO is not barred to appraise the facts and circumstances of the case and ascertain the true intention borne out by facts and evidences on record. There are a plethora of decisions which have enunciated ad-infinitum that an AO is duty bound to appraise the facts and evidences, he is not to view the transactions facts and circumstances by putting on blinkers and follow the earlier orders simply because the facts at that time were different. If an appraisal of facts and circumstances has been wrongly done at a point of time, he is not required to put on blinkers for all times to come and ignore the facts which stare him in his face. He is required to ascertain the claim of the assessee taking into consideration the recording of entries in the assessee's books of accounts and then form his opinion.
13. There is also no dispute over the issue that in case the AO departs from the consistent stand, then he is required to spell out clearly the reasons for the departure. He is required to give notice to the assessee in order to enable him to meet the doubts and to afford the assessee an effective opportunity of being heard to lead whatever evidence he would like to lead to show that the departure from the consistent stand should not be made. Then, in such an eventuality, if the AO still feels that the consistency would in fact result in a grave error of law, then he is required to give his reasons for not accepting the assessee's contentions. In facts available on record, in the present case, there is no dispute that the AO has put the assessee to notice has given him full hearing and given specific reasons for making a departure in the year under consideration. Simply because in the earlier assessment years the Department has been accepting the assessee's stand, that reason by itself in the peculiar case, of this kind is not a good enough reason as over a period of time, the conduct of the assessee clearly gives effect to the intention of the assessee and by way of this continuous sale which the assessee calls is investments is actuality it's stock-in-trade and has rightly been held to be so by the AO. It is a settled legal proposition that the AO in the course of the assessment proceedings is required to examine and ascertain the actual affect of past actions to see the intention of the assessee and res-judicata does not apply as each year is required to be examined independently and the AO is required to address and come to an independent finding no doubt taking into consideration the findings arrived at in the earlier years. The AO is well within his rights to examine and enquire into the issue. The only answer which the assessee has is that the past conduct has been accepted or that the assessee is unlocking its investments in a phased manner. We have already commented upon the relevance of past conduct which both the department and the assessee are of the view is relevant. However, they differ on the treatment to be given. The Revenue's case is that the past facts spell out the actual intention which according to the Revenue is inconsistent with the stand taken by the assessee. The assessee, on the other hand, is resting its foundation that the Revenue has accepted the consistent stand of the assessee over the years and its objection is based on the fact that the Revenue is barred from making a departure there from. We are of the view that the objection of the assessee is not well founded.
In the peculiar facts of the case, the bonafide acceptance of assessee's version will not give the assessee a vested right to argue that the error in appreciation and appraisal should continue ad infinitum. Apart from consistency, the assessee has not been able to argue anything to bar the Revenue. Simply because in the past the Revenue did not harbor any suspicions, conjectures and surmises to presuppose that the assessee when recording a certain entry as an investment is actually treating it as stock-in-trade in the earlier years would have been contrary to all accepted legal principles in view of the fact that in the absence of any evidence to the contrary, the suspicion at that point of time would have been premature and may not be supported by future actions and, as such, be thrown out of Court instantly. However, in the facts of the present case, the actions of the assessee over a period of time give the AO adequate reasons to conclude that the entry recorded as an investment is actually its stock-in-trade which fact is proved by the consistent stand of the assessee over a period of years with which we are in full agreement.
Accordingly, after having given our utmost consideration to the decisions relied upon, the peculiar facts and circumstances of the case before us and the orders of the tax authorities, we have no hesitation in upholding the same. As such, ground Nos. 2, 4, and 6 raised by the assessee are rejected.
14. With respect to ground No. 3, nothing was stated on behalf of the assessee. As such, it does not require any adjudication.