Manne Subba Rao, Rajamahendravaram V. Assistant Commissioner of Income Tax, Circle - 2(1), , Rajamahendravaram

ITA 158/VIZ/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0311 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 04-05-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Cost of acquisition; Date of conversion; Fair market value; Revised return
• Section: 45(2); 43CA; 50C

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER . / I . T .A.NO. 158 /VIZ/ 201 8 ( / ASSESSMENT YEAR: 20 1 4 - 20 1 5 ) MANNE SUBBA RAO D.NO.78 - 15 - 21/5,T - 1, BLOCK - 1, RAMA RESIDENCY SYAMALA NAGAR RAJAMAHENDRAVARAM [PAN : AYYPS 3433R] ACIT, CIRCLE - 2(1) RAJAMAHENDRAVARAM ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI G.V.N.HARI , AR / RESPONDENT BY : S MT. SUMAN MALIK, DR / DATE OF HEARING : 2 7 . 11. 2018 / DATE OF PRONOUNCEMENT : 07 . 1 2 .2018 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(CIT(A)] - 3 , VISAKHAPATNAM VIDE ITA NO. 38/2017 - 18/CIT(A) - 3/VSP/2017 - 18 DATED 19 . 12 .201 7 FOR THE A SSESSMENT Y EAR (A.Y.) 20 14 - 15 . 2 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM 2. THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.6,68,370/ - ON 04.08.2014 FOR THE A.Y. 2014 - 15. THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED ON TOTAL INCOME OF RS.26,01,320/ - . IN THE ASSESSMENT, THE ASSESSING OFFICER (AO) COMPUTED THE SHORT TERM CAPITAL GAINS FROM SALE OF PLOTS AT RS.19,32,070/ - . DURING THE ASSESSMENT PROCEEDING S, THE AO FOUND THAT THE ASSESSEE HAS SOLD 9 PLOTS TO DIFFERENT PARTIES ADOPTING REGIST ERED VALUE , (A CTUAL S ALE C ONSIDERATION ) WHICH IS LESSER THAN THE MARKET VALUE (SRO VALUE) . THE AO FURNISHED THE DETAILS OF DOCUMENT NO., REGIST ERED VALUE AND THE MARKET VALUE, DOCUMENT WISE IN PAGE NO.2 OF THE ASSESSMENT ORDER AS UNDER : S.NO. DOCUMENT NO. DATE OF SALE REGN.VALUE MARKET VALUE 1. 23.04.2013 2968/2013 5,48,000 12,05,000 2. 23.04.2013 2969/2013 5,48,000 12 ,05,000 3. 23.04.2013 2970/2013 5,48,000 12 ,05,000 4. 23.04.2013 297 1 /2013 5,50,000 12 ,10,000 5. 23.04.2013 297 2 /2013 5 ,50,000 12 ,10,000 6. 23.04.2013 297 3 /2013 5 ,50,000 12 ,05,000 7. 23.04.2013 297 4 /2013 5 ,50,000 12 ,05,000 8. 23.04.2013 297 5 /2013 5 ,50,000 12 ,05,000 9. 23.04.2013 297 6 /2013 5 ,50,000 12 ,00,000 10. TOTAL 49,44,000 1,08,50,000 IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAS ADMITTED THE RECEIPT OF RS.49,38,000/ - TOWARDS SALE OF PLOTS AND DEBITED A SUM OF RS.89,17,930 / - AS EXPENDITURE (FMV ON CONVERSION OF THE ASSET AS STOCK - IN - TRADE) AND ARRIVED 3 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM AT A LOSS OF RS.39,79,930/ - . DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE STATED THAT VACANT LAND WAS PURCHASED BY THE ASSESSEE DURING THE FINANCIAL YEAR 2012 - 13 WITH AN INTENTION TO CONSTRUCT FLATS. DUE TO FINANCIAL CONSTRAINTS AND ALSO IN VIEW OF HI S HEALTH PROBLEMS, THE SAID LAND WAS CONVERTED INTO PLOTS AND WAS SOLD IN THE FINANCIAL YEAR 2013 - 14 RELEVANT TO THE A.Y. 2014 - 15. THE ASSESSEE FURTHER SUBMITTED THAT THE HE HAS NOT SHOWN THE OPENING STOCK AND THE CLOSING STOCK OF VACANT PLOTS IN THE PROF IT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.03.2012 RELEVANT TO THE A.Y. 2012 - 13. THE AO ASKED THE ASSESSEE TO FURNISH THE EVIDENCES IN SUPPORT OF CONVERSION OF LAND INTO P L OTS FROM THE MUNICIPAL AUTHORITIES , BUT THE ASSESSEE FAILED TO PRODUCE ANY EVIDENCE FOR THE SAME, HENCE THE AO DENIED THE ASSESSEES CLAIM OF BUSINESS INCOME AND TREATED THE SAME AS SHORT TERM CAPITAL GAINS. ACCORDINGLY BROUGHT TO TAX THE SUM OF RS.19,32,070/ - UNDER THE HEAD SHORT TERM CAPITAL GAINS AS UNDER : SALE CONSIDERATION RECEIVED FROM SALE OF 9 PLOTS RS.1,08,50,000 LESS : COST OF ACQUISITION AS ADMITTED RS.89,17,930 SHORT TERM CAPITAL GAINS RS.19,32,070 THE ASSESSING OFFICER ALSO ESTIMATED THE INCOME OF THE ASSESSEE @8% OF THE GROSS RECEIPTS FOR WHICH THE ASSESSEE HAD AGREED FOR THE ADDITION. THE ESTIMATION OF INCOME WAS MADE ON THE RECEIPTS OF 4 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM RS.76,00,000/ - WHICH REPRESENT THE SALE OF FLATS AND DOES NOT INCLUDE THE RECEIPTS OF RS.49,38,000/ - RELATING TO THE SALE OF PLOTS. 3. AGAINST THE ORDER OF THE AO, THE ASSES SEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) HELD THAT THE ASSESSEE HAD CONVERTED THE CAPITAL ASSET INTO STOCK - IN - TRADE ON 01.04.2013 AND SOLD THE SAID PLOTS ON 23.04.2013 , HENCE , THE CAPITAL GAINS REQUIRED TO BE CALCULATED AS PER SECTION 45(2) O F THE ACT ADOPTING THE FAIR MARKET VALUE AS ON TH E RELEVANT DATE OF TRANSFER . SINCE THE YEAR OF CONVERSION AND THE SALE OF PLOTS HAVE FALLEN DURING THE SAME PREVIOUS YEAR, T HE LD.CIT(A) HELD THAT THE AO HAS CORRECTLY ADOPTED THE DIFFERENCE BETWEEN THE PUR CHASE PRICE AND FAIR MARKET VALUE OF THE ASSET AND COMPUTED THE SHORT TERM CAPITAL GAINS AT RS.19,32,070/ - . THE LD.CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS DECLARED THE BUSINESS LOSS OF 39,79,930/ - AND FILED THE RETURN OF INCOME BEYOND THE DUE DATE BU T THE AO HAS NOT CONSIDERED THIS ASPECT IN THE ASSESSMENT ORDER. THE LD.CIT(A) OBSERVED THAT THE D UE DATE FOR FILING THE RETURN OF INCOME FOR THE A.Y. 2014 - 15 WA S 30.09.2014 AND T HE RETURN OF INCOME WAS FILED ON 04.08.2014 DISCLOSING CAPITAL GAINS . THE REV ISED RETURN OF INCOME WAS FILED ON 22.09.2015 CLAIMING THE LOSS OF RS.33,00,790 / - . N O LOSS WAS CLAIMED BY THE ASSESSEE IN THE ORIGINAL RETURN OF INCOME, HENCE HELD THAT THE LOSS CLAIMED 5 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM BY THE ASSESSEE ON ACCOUNT OF SALE OF PLOTS WAS ALSO NOT ALLOWED BY THE AO. ACCORDINGLY , THE LD.CIT(A) CONFIRMED THE ACTION OF THE AO IN DISALLOWING THE LOSS. FOR THE SAKE OF CLARITY, W E EXTRACT THE RELEVANT PART OF THE ORDER OF THE LD. CIT(A) AVAILABLE IN PAGE NO.4 PARA 5.3 TO 5.5. WHICH READS AS UNDER : 5.3. IT IS CLEAR FROM THE ABOVE THAT THE CORE ISSUE IN THIS APPEAL IS WHETHER SECTION 45(2) OF THE ACT IS APPLICABLE IN THIS CASE OR NOT? IF APPLICABLE, WHETHER CAPITAL GAINS AS WELL AS BUSINESS INCOME IS EXIGIBLE? IN THIS CONTEXT, IT IS RELEVANT TO EXAMIN E THE PROVISIONS OF SECTION 45(2) OF THE ACT. SECTION 45(2): [(2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB - SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITOL ASSET INTO, OR ITS TREATMENT BY HIM AS S TACK - IN - TRADE OF A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME - TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK - IN - TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE D ATE OF SUCH CONVERSION OR TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET.] A CURSORY READING OF SECTION 45(2) OF THE ACT REVEALS CERTAIN CONDITIONS; 1. THERE MUST BE AN ASSET EXISTING. 2. THE ASSET MUST BE CAPITAL IN NATURE 3. THERE MUST BE A TRANSFER OF SUCH ASSET U/S. 2(47) OF THE ACT. 4. THE TRANSFER MUST BE FOR SOME CONSIDERATION U/S. 48 OF THE ACT. 5. THE CONSIDERATION MUST BE IN MONETARY TERMS. 6. PROFITS OR GAINS MUST ARISE B Y WAY OF TRANSFER. 5.4. SECTION 45(2) CREATES F ICTION WITH REGARD TO 'CONSIDERATION' U/S. 48 OF THE ACT. GENERALLY THERE WILL BE NO CAPITAL GAINS WITHOUT CONSIDERATION FOR TRANSFER OF CAPITAL ASSET. THERE IS NO MONETARY CONSIDERATION FOR THE ASSET IF CONVERSION TAKES PLACE. DUE TO THIS ASPECT, SECTION 45(2) CONTEMPLATES FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION AS 'CONSIDERATION'. THEREFORE, AS PER SECTION 45(2), THE CAPITAL GAIN S ARISING OUT OF CONVERSION OF ASSET INTO STOCK - IN - TRADE WILL BE CHARGED UNDER THE HEAD CAPITAL GAI NS. THIS SECTION ALSO IMPOSES F ICTION WITH REFERENCE TO TRANSFER U/S.2(47)(IV) OF THE ACT. IN THE EVENT OF CONVERSION, THERE IS NO PHYSICAL TRANSFER OF THE A SSET AS CONTEMPLATED U/S. 2(47)(IV) OF THE ACT. HOWEVER, SECTION 45(2) CONTEMPLATES CONVERSION OF ASSET INTO STOCK - IN - TRADE AS TRANSFER FOR THE PURPOSE OF CAPITAL 6 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM GAINS. THIS IS THE REASON WHY SECTION 45(2) MAKES BOTH THE SECTIONS 48 AND 2(47) AS NON - OPERA TIONAL BY MAKING THE PROVISIONS OF SECTION 45(2) AS NON - ABSTANTE CLAUSE. THUS, THE CONVERSION OF CAPITAL ASSET IS CONSIDERED AS DEEMED TRANSFER. THEREFORE, THIS DEEMING PROVISION ENABLED FAIR MARKET VALUE AS FULL VALUE OF CONSIDERATION AT THE TIME OF CONVE RSION. PRIOR TO THE INTRODUCTION OF THIS SECTION, THE TAXPAYERS WERE MAKING USE OF CONVERSION OF CAPITAL ASSET INTO THE STOCK - IN - TRADE TO AVOID CAPITAL GAINS DUE TO THE ABSENCE OF VALUE AND TRANSFER. T HUS, THIS PROVISION HAS COME INTO THE STATUTE IN ORDER TO CURB THIS PRACTICE. IN THE INSTANT CASE, THE APPELLANT HAD CONVERTED THE CAPITAL ASSET INTO STOCK - IN - TRADE ON 01.04.2013 AND SOLD IT ON 23.04.2013. THEREFORE, THE CAPITAL GAINS WILL HAVE TO BE CALCULATED AS PER SECTION 45(2) ADOPTING THE FAIR MARKET VAL UE AS ON THE DATE OF SALE. THE FAIR MARKET VALUE ON THE DATE OF SALE AS PER SRO IS RS.1,08,50,000/ - . THE ASSESSING OFFICER HAS CORRECTLY ADOPTED THE DIFFERENCE OF PRICE BETWEEN PURCHASE PRICE AND FAIR MARKET VALUE OF THE ASSET. THUS, THE SHORT - TERM CAPITAL GAINS OF RS.19,32,070/ - IS CONFIRMED. SECTION 45(2) OF THE ACT ALSO CONTEMPLATES BUSINESS PROFITS AS AND WHEN THE SALE OF STOCK TAKES PLACE. 5.5. REGARDING THE BUSINESS PROFITS, THE FACTS ARE THAT THE APPELLANT HAD PURCHASED THE ASSET IN THE FINANCIA L YEAR 2012 - 13 FOR RS.89,17,930/ - AND SOLD TO 9 PERSONS FOR RS.49,38,000! - AND SHOWN/ ADMITTED A LOSS OF RS39,79,930/ - . THE ASSESSING OFFICER HAS NOT CONSIDERED THIS ASPECT IN THE ASSESSMENT ORDER. DUE DATE FOR FILING OF RETURN OF INCOME FOR THE ASST. YEAR 2 014 - 15 IS 30.09.2014. THE ORIGINAL RETURN OF INCOME WAS FILED ON 04 . 08.2014 WITHOUT DISCLOSING CAPITAL GAINS AND THE REVISED RETURN OF INCOME WAS FILED ON 22.09.2015 CLAIMING A LOSS OF RS.33,00,790/ - . SINCE THERE IS NO LOSS CLAIMED IN THE ORIGINAL RETURN O F INCOME, THE LOSS CLAIMED BY THE APPELLANT DUE TO SATE OF ASSET IS NOT ALLOWED BY THE ASSESSING OFFICER. THE APPELLANT HAS FILED HIS REVISED RETURN OF INCOME ON 22.09.2015 WHICH IS NOT WITHIN THE DUE DATE, HENCE, THE LOSS CLAIMED IS NOT ALLOWED. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. IN THIS CASE, THE ASSESSEE STATED THAT THE VACANT LAND WAS CONVERTED INTO PLOTS ON 01/04/2013 AND THE FAIR MARKET VALUE OF THE LAND AS ON THAT DATE WAS RS.89,17,930/ - . THE SAID L AND WAS SOLD ON 23 . 04 . 2013 IN THE SAME ASSESSMENT YEAR. THEREFORE, THERE WAS SHORT TERM CAPITAL GAINS REQUIRED TO BE ASSESSED IN THE IMPUGNED ASSESSMENT YEAR AS PER SECTION 45(2) OF THE 7 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM ACT FOR CONVERSION OF THE CAPITAL ASSET INTO BUSINESS ASSET. SIMILARLY THE SALE OF BUSINESS ASSETS RESULTS INTO BUSINESS INCOME. THUS IN THE INSTANT CASE, THE AO HAS TO ASSESS THE SHORT TERM CAPITAL GAINS AS WELL AS THE BUSINESS INCOME. T HE ASSESSEE HAS SOLD THE LAND DURING THE YEAR UNDER CONSIDERATION AND ACCOUNTED ONLY THE ACTUAL CONSIDERATION RECEIVED AS BUSINESS RECEIPT INSTEAD OF THE FAIR MARKET VALUE. AS PER SECTION 43CA OF THE ACT W.E.F. A.Y.2014 - 15, IN THE CASE OF BUSINESS ASSET, BEING LAND AND BUILDING , THE ASSESSEE IS REQUIRED TO ADOPT THE RATE ASSESSED BY THE STAMPS AND REGISTRATION AUTHORITIES OF THE GOVT. OF RESPECTIVE STATE AS FAIR MARKET VALUE OF THE LAND AND BUILDING AS DEEMED CONSIDERATION FOR THE STOCK - IN - TRADE ALSO . . THEREFORE, THE AO HAS TO COMPUTE THE SHORT TERM CAPITAL GAINS AND THE BUSINESS LOSS/PROFIT BY APPLYING THE SECTION 50C AND 43CA RESPECTIVELY, AS PER THE SRO VALUE, FOR THE PROPERTIES CONVERTED IN TO STOCK IN TRADE AND SOLD AS PLOTS. IN THE INSTANT CASE, BOTH THE ISSUES OF SHORT TE R M CAPITAL GAINS AS WELL AS THE SALE OF LAND WAS OCCURRED IN THE SAME ASSESSMENT YEAR, THEREFORE, THE ASSESSEE IS ENTITLED FOR SET OFF OF LOSS IF ANY RELATING TO THE SAME ASSESSMENT YEAR U/S 71 OF THE ACT. SINCE THE AO AS WELL AS THE LD.CIT(A) DID NOT EXAMINE THE ABOVE ISSUE S , WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE REQUIRED TO BE REEXAMINED BY THE LOWER AUTHORITIES AND A CCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES 8 I.T.A. NO . 158 /VIZ/201 8 MANNE SUBBA RAO, RAJAMAHENDRAVARAM AND REMIT THE MATTER BACK TO THE FILE O F THE AO TO DECIDE THE ISSUE AFRESH ON MERITS. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS SET ASIDE TO THE FILE OF THE AO FOR DENOVO CONSIDERATION. 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE . O RDER PRONOUNCED IN THE OPE N COURT ON 7 TH DECEMBER , 2018 . S D/ - S D/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 07 . 1 2 .2018 L.RAMA, SPS / COPY OF THE ORDER FORWARDED TO: - 1. / THE ASSESSEE MANNE SUBBA RAO , D.NO.78 - 15 - 21/5,T - 1, BLOCK - 1, RAMA RESIDENCY , SYAMALA NAGAR , RAJAMAHENDRAVARAM 2 . / THE REVENUE ACIT, CIRCLE - 2(1), RAJAMAHENDRAVARAM 3. THE PR. COMMISSIONER OF INCOME TAX, RAJAMAHENDRAVARAM 4. THE COMMISSIONER OF INCOME TAX - (APPEALS) - 3 , VISAKHAPATNAM 5 . , , / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM