THE ITO, WARD - 2, Eluru V. P Krishnam Raju, Eluru

CO 30/VIZ/2013

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 2241 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 11-02-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 03-11-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 27-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset converted into stock in trade; Capital asset; Date of conversion; Fair market value
• Section: 45(2); 54B; 54F; 142(1)

Judgement Text

ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.475/VIZAG/2012 ( / ASSESSMENT YEAR:2009-10) ITO , WARD - 2 , ELURU VS. P. KRISHNAM RAJU ELURU [PAN: AEXPP1245R ] ( / APPELLANT) ( / RESPONDENT) C.O. NO.30/VIZAG/2013 (ARISING OUT OF I.T.A.NO.475/VIZAG/2012) ( / ASSESSMENT YEAR:2009-10) P. KRISHNAM RAJU ELURU VS. ITO , WARD - 2 , ELURU ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SMT. D. KOMALI KRISHNA FOR SHRI M.N. MURTHY NAIK, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR / DATE OF HEARING : 08.01.2016 / DATE OF PRONOUNCEMENT : 11.02.2016 ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 2 / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER: THIS APPEAL FILED BY THE REVENUE AND CROSS OBJECTI ON FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF CIT(A), GUNTUR DATED 9.10.2012 AND IT PERTAINS TO THE ASSESSMENT YEAR 20 09-10. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 31.7.2011 DECLARING A TOTAL INCOME OF ` 66,53,457/-, COMPRISING INCOME FROM LONG TERM CAPITAL GAIN AFTER CLAIMING EXEMPTIONS U/S 54B & 54F OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT'). T HE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY, NOTICES U/S 143(2) & 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REP RESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED T HE REQUIRED INFORMATION. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS DECLARED LONG TERM CA PITAL GAIN FROM SALE OF RESIDENTIAL SITES. WHEN A SPECIFIC QUERY FROM A. O., THE ASSESSEE STATED THAT HE HAS CONVERTED AGRICULTURAL LAND INTO NON-AG RICULTURAL PURPOSES, FORMED RESIDENTIAL SITES AND SOLD. SINCE, THE ASSES SEE CONVERTED CAPITAL ASSET INTO STOCK IN TRADE, THE A.O. WAS OF THE OPIN ION THAT THE PROVISIONS OF SECTION 45(2) OF THE ACT ATTRACTS, THEREFORE, IS SUED A SHOW CAUSE ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 3 NOTICE AND ASKED TO EXPLAIN WHY THE PROVISIONS OF S ECTION 45(2) OF THE ACT SHALL NOT BE INVOKED. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FILED A LETTER ON 28.12.2011 AND SUBMITTED THAT SECTION 45(2) OF THE ACT IS NOT APPLICABLE, AS HE HAS SOLD THE LAND WHICH WAS HELD AS CAPITAL ASSET AND NOT STOCK IN TRADE. HOWEVER, DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, INITIALLY THE ASSESSEE CONT ENDED THAT PROVISIONS OF SECTION 45(2) OF THE ACT WAS NOT APPLICABLE, LAT ER FILED A COMPUTATION SHOWING THE WORKING OF DEEMED CAPITAL GAIN FOR CONV ERSION OF CAPITAL ASSET INTO STOCK IN TRADE. THE A.O. AFTER CONSIDER ING THE EXPLANATIONS FURNISHED BY THE ASSESSEE HELD THAT THE ASSESSEE HA S CONVERTED CAPITAL ASSET INTO STOCK IN TRADE AND HENCE, THE PROVISIONS OF SECTION 45(2) OF THE ACT ARE APPLICABLE. ACCORDINGLY, COMPUTED LONG TERM CAPITAL GAIN FOR CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE AS ON THE DATE OF CONVERSION AND ALSO COMPUTED INCOME FROM BUSINESS P ROPORTIONATELY TO THE AREA OF SITE SOLD DURING THE YEAR UNDER CONSIDE RATION AND DETERMINED TOTAL INCOME OF ` 1,29,08,258/- AS AGAINST THE DECLARED INCOME OF ` 66,53,457/-. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A) THE AS SESSEE SUBMITTED THAT THE A.O. WAS ERRED IN ADOPTING GROSS LAND AREA FOR THE PURPOSE OF ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 4 COMPUTATION OF LTCG AND DEVELOPED LAND AREA FOR THE PURPOSE OF COMPUTATION OF INCOME FROM BUSINESS. THE ASSESSEE FURTHER SUBMITTED THAT THE A.O. HAS TAKEN 30,492 SQ. YARDS. IN TERMS OF AGRICULTURAL LAND FOR THE PURPOSE OF COMPUTATION OF LONG TERM CAPITAL GAIN, WHEREAS ADOPTED 20,714 SQ.YARDS. FOR THE PURPOSE OF COMPUTA TION OF INCOME FROM BUSINESS, THEREBY EXCLUDED 9,778 SQ.YDS. LAND WHICH REPRESENTS EASEMENTS LAY OUT TOWARDS INTERNAL ROADS, DRAINAGE AND OTHER CIVIC AMENITIES. THE ASSESSEE FURTHER SUBMITTED THAT WHE N A RESIDENTIAL LAYOUT IS FORMED BY CONVERSION OF AGRICULTURAL LAND INTO RESIDENTIAL LAYOUT, ONE HAS TO NECESSARILY PROVIDE SETBACK FOR INTERNAL ROADS, DRAINAGE AND OTHER CIVIC AMENITIES, THEREFORE, THE A.O. SHOULD H AVE ALLOWED THE COST OF SUCH EASEMENT AREA WHILE COMPUTING THE INCOME FR OM BUSINESS. THE CIT(A), HOWEVER AFTER CONSIDERING THE EXPLANATIONS FURNISHED BY THE ASSESSEE DIRECTED THE A.O. TO ALLOW THE COST OF 9,7 78 SQ.YARDS. LAND ALLOWED FOR SETBACK. THE CIT(A) FURTHER HELD THAT THE ASSESSEE HAS ALLOWED NECESSARY SETBACK FOR INTERNAL ROADS, DRAIN AGE AND OTHER CIVIC AMENITIES WHILE FORMING THE RESIDENTIAL LAYOUT, THE REFORE, THE COST OF SUCH LAND SHOULD BE ALLOWED FOR COMPUTATION OF INCO ME FROM BUSINESS. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN AP PEAL BEFORE US. ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 5 4. THE LD. D.R. SUBMITTED THAT THE CIT(A) WAS ERRED IN DIRECTING THE A.O. TO DELETE THE ADDITIONS MADE TOWARDS COST OF 9 ,778 SQ.YDS LAND ALLOWED FOR INTERNAL ROADS, DRAINAGE AND OTHER CIVI C AMENITY PURPOSES. THE LD. D.R. FURTHER SUBMITTED THAT THE A.O. HAS RI GHTLY CALCULATED THE CAPITAL GAIN BY TAKING THE AGRICULTURAL LAND CONERT ED INTO STOCK IN TRADE AND COMPUTED INCOME FROM BUSINESS BY TAKING THE ARE A OF DEVELOPED LANDS SOLD DURING THE YEAR. THERE WAS NO ERROR IN THE COMPUTATION MADE BY THE A.O. WITH REGARD TO COMPUTATION OF INCOME FR OM BUSINESS, THEREFORE, HIS ORDER SHOULD BE UPHELD. ON THE OTHER HAND, THE LD. A.R. OF THE ASSESSEE STRONGLY SUPPORTED THE CIT(A) ORDER. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIE S BELOW. THE ONLY ISSUE CAME UP FOR OUR CONSIDERATION IS COMPUTATION OF INCOME FROM BUSINESS U/S 45(2) OF THE ACT, WHEN A CAPITAL ASSET CONVERTED INTO STOCK IN TRADE. IN THE PRESENT CASE, THE ASSESSEE HAS CO NVERTED 21.2 ACRES OF AGRICULTURAL LAND INTO NON AGRICULTURAL PURPOSES AN D FORMED RESIDENTIAL LAYOUT. AS STATED BY THE A.O., THE ASSESSEE HAS CO NVERTED 1,02,608 SQ.YDS LAND AND DEVELOPED 69,646 SQ.YDS RESIDENTIAL SITES. THE A.O. HAS GIVEN THE DETAILED CALCULATIONS WITH REGARD TO THE COMPUTATION OF CAPITAL GAIN AND INCOME FROM BUSINESS. THERE WAS NO DISPUT E WITH REGARD TO ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 6 THE APPLICABILITY OF THE PROVISIONS OF SECTION 45(2 ) OF THE ACT AND RELATED COMPUTATION OF CAPITAL GAIN AS WELL AS INCOME FROM BUSINESS. THE ONLY DISPUTE WOULD BE IN RESPECT OF COMPUTATION OF INCOM E FROM BUSINESS AND ADOPTING PROPORTIONATE LAND AREA FOR SUCH COMPUTATI ON. THE A.O. WHILE COMPUTING THE LONG TERM CAPITAL GAIN HAS ADOPTED GR OSS AREA OF THE LAND CONVERTED INTO STOCK IN TRADE AND AT THE SAME TIME HAS CONSIDERED PROPORTIONATE DEVELOPED AREA OF LAND FOR THE PURPOS E OF COMPUTATION OF INCOME FROM BUSINESS. 6. WE HAVE GONE THROUGH THE METHOD OF COMPUTATION OF LONG TERM CAPITAL GAIN AND INCOME FROM BUSINESS, WHICH IS EXT RACTED BY THE A.O. AT PAGE 3 & 5 OF ASSESSMENT ORDER. ON PERUSAL OF BOTH THE CALCULATIONS, WE FIND THAT THE A.O. HAS ADOPTED 1,02,608 SQ.YDS. FOR COMPUTATION OF CAPITAL GAIN AND 69,646 SQ.YDS. FOR COMPUTATION OF INCOME FROM BUSINESS. THE A.O. HAS GIVEN HIS OWN REASONS FOR A DOPTING SUCH VALUES FOR CALCULATION OF CAPITAL GAIN AND INCOME FROM BUS INESS. AS PER THE A.O., THE ASSESSEE HAS DEVELOPED 69646 SQ.YDS OF SA LEABLE LAND, WHICH IS ONLY QUALIFIES FOR COMPUTATION OF INCOME FROM BU SINESS, WHEREAS THE WHOLE LOT OF CAPITAL ASSET I.E. 1,02,608 SQ.YDS. IS LIABLE FOR CAPITAL GAIN. THE A.O. HAS IGNORED DIFFERENTIAL LAND AREA OF 9,77 8 SQ.YDS USED FOR INTERNAL ROADS, DRAINS, PARKS AND OTHER CIVIC AMENI TIES, WHICH IS ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 7 MANDATORY SET BACK ALLOWED FOR FORMATION OF RESIDEN TIAL LAYOUTS. THE ASSESSEE CONTENTION IS THAT WHEN A RESIDENTIAL LAYO UT IS FORMED, AS PER THE SANCTION PLAN, COMPULSORY SET BACK SHOULD BE AL LOWED FOR INTERNAL ROADS, DRAINS AND OTHER CIVIC AMENITIES. THE A.O. HAS NOT DISPUTED THE FACT WITH REGARD TO THE DEVELOPED AREA, WHICH IS EV IDENT FROM THE ASSESSMENT ORDER, WHEREIN HE HAS RIGHTLY ARRIVED LA ND DEVELOPED IN TO RESIDENTIAL SITES. BUT, WHILE COMPUTING THE CAPITA L GAIN OF ` 1,64,51,958/- HE HAS TAKEN 30,492 SQ.YDS. LAND (PROPORTIONATE AGR ICULTURAL LAND CONVERTED INTO DEVELOPED SITE AREA OF 20,714 SQ.YDS .) FOR COMPUTING THE FMV ON 1.4.2008 AT ` 1,67,70,600/- @ ` 550/- PER SQ.YD. HOWEVER, WHILE COMPUTING THE INCOME FROM BUSINESS, THE A.O. HAS TA KEN 20,714 SQ.YDS. DEVELOPED SITE AREA (ACTUAL LAND SOLD IN TERMS OF S ITE IN THE FINANCIAL YEAR 2007-08) FOR COMPUTING THE PROPORTIONATE COST OF FL AT SOLD OF ` .1,13,92,700/- TO COMPUTE THE INCOME FROM BUSINESS AND IGNORED THE PROPORTIONATE LAND AREA OF 9,778 SQ.YDS EARMARKED F OR INTERNAL ROADS, DRAINS AND OTHER CIVIC AMENITIES, THEREBY DENIED CO ST OF SUCH LAND OF ` 53,77,900/-. 7. THE A.O. HAS GIVEN TWO SEPARATE CALCULATIONS FOR COMPUTATION OF INCOME FROM CAPITAL GAIN AND INCOME FROM BUSINESS W HICH IS EXTRACTED AT PAGE 3 & 5 OF ASSESSMENT ORDER. ON PERUSAL OF SUCH CALCULATIONS, WE ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 8 FIND THAT THE A.O. HAS ERRED IN ADOPTING TWO DIFFER ENT AREA OF LAND FOR COMPUTATION OF CAPITAL GAINS AND INCOME FROM BUSINE SS. WHEN A CAPITAL ASSET IS CONVERTED INTO STOCK IN TRADE, AS PER SECT ION 45(2) OF THE ACT, IT IS CERTAIN THAT THE ASSESSEE NEEDS TO COMPUTE LONG TERM CAPITAL GAINS AS ON THE DATE OF CONVERSION AND PAY TAX AS AND WHEN S UCH CAPITAL ASSET IS SOLD. BUT, WHEN IT COMES TO CALCULATION OF CAPITAL GAIN AS WELL AS INCOME FROM BUSINESS, THERE WONT BE ANY DIFFERENCE IN THE AREA OF CAPITAL ASSET CONVERTED INTO STOCK IN TRADE AND STOCK IN TRADE US ED FOR BUSINESS PURPOSE. IN THE PRESENT CASE ON HAND, ON PERUSAL O F THE CALCULATIONS PROVIDED BY THE A.O., WE FIND THAT THE A.O. HAS MAD E BASIC MISTAKE IN CALCULATING THE PROPORTIONATE LAND AREA FOR THE PUR POSE OF COMPUTATION OF INCOME FROM BUSINESS, BY IGNORING THE LAND EARMA RKED FOR INTERNAL ROADS, DRAINS AND OTHER CIVIC AMENITIES. THOUGH AS SESSEE COULD NOT RECEIVE ANY VALUE FOR SUCH EARMARKED LAND, WHICH IS MANDATORY FOR ANY DEVELOPER TO ALLOW SETBACK AS PER THE PREVAILING LA WS REGULATING SUCH ACTIVITIES. THEREFORE, WE ARE OF THE OPINION THAT T HE A.O. WAS NOT CORRECT IN ADOPTING GROSS LAND FOR COMPUTING LONG TERM CAPI TAL GAIN AND ONLY SALEABLE LAND FOR THE PURPOSE OF INCOME FROM BUSINE SS. THE CIT(A) RIGHTLY DELETED THE ADDITION. WE DO NOT SEE ANY ERR OR IN THE ORDER OF CIT(A). HENCE, WE INCLINED TO UPHELD THE ORDER OF C IT(A) AND DIRECT THE A.O. TO ALLOW THE COST OF 9,778 SQ.YDS. LAND WHICH IS EARMARKED FOR ITA NO.475/VIZAG/2012 & CO 30/VIZAG/2013 P. KRISHNAM RAJU, ELURU 9 ROADS, DRAINS, PARKS AND OTHER CIVIC AMENITIES FOR THE PURPOSE OF COMPUTATION OF INCOME FROM BUSINESS. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 9. THE C.O. FILED BY THE ASSESSEE IS SUPPORTING THE ORDER OF THE CIT(A). THEREFORE, FOR THE REASONS STATED IN THE P RECEDING PARAGRAPH, WE DISMISS THE C.O. FILED BY THE ASSESSEE. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE C.O. FILED BY THE ASSESSEE IS ALSO DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 11 TH FEB16. SD/- SD/- ( . ) ( . ) (G. MANJUNATHA) (V. DURGA RAO) /ACCOUNTANT MEMBER /JUDICIAL MEMBER # /VISAKHAPATNAM: ' /DATED : 11.2.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE ITO WARD-2, ELURU 2. / THE RESPONDENT SHRI P. KRISHNAM RAJU, S/O PEDD IRAJU, 25-01, PAPASAHEB STREET, R.R. PET, ELURU-534 002, ELURU 3. + / THE CIT, GUNTUR 4. + ( ) / THE CIT (A), GUNTUR 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER