DCIT, Cochin V. M/s.Synthite Industries Ltd, Cochin

ITA 350/COCH/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8785 (ITAT-COCHIN)
• Duration Of Justice: 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 11-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 17-07-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Keywords: Capital asset; Business income; Earning of tax free income; Proportionate interest; Date of conversion; Fair market value
• Section: 45(2); 2(14); 14A; 147

Judgement Text

1 ITA NO.270, 304 & 305 & 350-COCH-2014 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI CHANDRA PO OJARI (AM) I.T.A NO. 270/COCH/2014 - A.Y. 2007-08 I.T.A NO. 304/COCH/2014 - A.Y. 2008-09 I.T.A NO. 305/COCH/2014 - A.Y. 2009-10 SYNTHETITE INDUSTRIES LTD VS JCIT (OSD) AJAY VIHAR, M.G. ROAD CIR.4(1), KOCHI KOCHI 682 016 PAN : AAADCS5516E (APPELLANT) (RESPONDENT) I.T.A. 305/COCH/2014 (ASSESSMENT YEAR 2008-09) DY.CIT, CIR.4(1) VS M/S SYNTHETITE INDUSTRIES L TD COCHIN AJAY VIHAR, ERNAKULZAM (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI THOMSON THOMAS REVENUE BY : SHRI K.K. JOHN DATE OF HEARING : 11-12-2014 DATE OF PRONOUNCEMENT : 06-02-2015 O R D E R PER N.R.S. GANESAN (JM) THE ASSESSEE FILED APPEALS FOR ASSESSMENT YEARS 20 07-08, 2008-09 AND 2009-10. REVENUE FILED THE APPEAL FOR ASSESSME NT YEAR 2008-09. 2 ITA NO.270, 304 & 305 & 350-COCH-2014 SINCE COMMON ISSUE ARISES FOR CONSIDERATION IN ALL THESE APPEALS, WE HEARD THE SAME TOGETHER AND DISPOSE THEM OF BY THIS COMMON ORDER. 2. SHRI THOMSON THOMAS, THE LD.REPRESENTATIVE FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSEE PURCHASE 512 CENTS OF A GRICULTURAL LAND ON 29- 03-2005 FOR EXPANSION OF ITS FACTORY. ACCORDING TO THE LD.REPRESENTATIVE, THE LAND WAS SITUATED NEXT TO THE ASSESSEES FACTOR Y AT KADAYIRUPPU, AIKARANADU NORTH VILLAGE WHICH IS A VILLAGE PANCHAY AT AND BEYOND 8 KMS RADIUS OF MUNICIPALITY. HOWEVER, THE LOCAL PEOPLE OBJECTED FOR THE EXPLANATION OF THE FACTORY IN THE LAND PURCHASED BY THE ASSESSEE. ACCORDINGLY, THE PROPOSAL FOR EXPANSION OF THE FACT ORY WAS DROPPED AND THE SAME WAS CONVERTED INTO RESIDENTIAL FLATS WITH AN I NTENTION TO DEVELOP VILLA PROJECTS. SINCE THE OBJECT OF THE COMPANY DOES NOT PERMIT THE ASSESSEE TO DO BUSINESS IN REAL ESTATE BY CONVERTING THE LAND I NTO RESIDENTIAL PLOTS, A RESOLUTION WAS PASSED ON 19-09-2006 TO CONVERT THE LAND INTO RESIDENTIAL PLOTS. ACCORDINGLY, THE SAID LAND WAS CONVERTED IN TO RESIDENTIAL PLOTS BY DIVIDING INTO PLOTS AND PART OF THE PLOTS TO THE EX TENT OF RS.1,18,23,750 WAS SOLD DURING THE FINANCIAL YEAR RELEVANT TO ASSESSME NT YEAR 2007-08. ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSEE CL AIMED GAIN ON SALE OF THE LAND AS EXEMPT FROM CAPITAL GAIN SINCE IT WAS A N AGRICULTURAL LAND SITUATED IN THE VILLAGE PANCHAYAT. HOWEVER, THE AS SESSING OFFICER BROUGHT 3 ITA NO.270, 304 & 305 & 350-COCH-2014 50% OF THE GAIN ON SALE OF THE LAND AS CAPITAL GAIN . THE REMAINING 50% WAS ASSESSED AS BUSINESS INCOME. 3. ACCORDING TO THE LD.REPRESENTATIVE, ON THE DATE OF CONVERSION OF LAND INTO STOCK IN TRADE BY DIVIDING THE SAME INTO RESID ENTIAL PLOTS, THE LAND IN QUESTION WAS AN AGRICULTURAL LAND IN FACT USED FOR AGRICULTURAL PURPOSE. ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSEE DE CLARED AN AMOUNT OF RS. 2,50,000 TOWARDS AGRICULTURAL INCOME FOR THE AS SESSMENT YEAR 2007- 08. THE VILLAGE OFFICER CERTIFIED THAT THE LAND IN QUESTION IS AN AGRICULTURAL LAND AND USED FOR AGRICULTURAL PURPOSE. THE COPY O F THE CERTIFICATE GIVEN BY THE VILLAGE OFFICER IS AVAILABLE AT PAGE 6 OF THE P APER BOOK. ACCORDING TO THE LD.REPRESENTATIVE, CONVERSION OF AGRICULTURAL L AND INTO STOCK IN TRADE BY DIVIDING THE SAME INTO HOUSING PLOTS CANNOT BE BROU GHT TO TAX UNDER CAPITAL GAIN TAX SINCE THE GAIN ON TRANSFER OF AGRICULTURAL LAND INTO STOCK IN TRADE IS EXEMPT U/S 2(14) OF THE CT. HOWEVER, THE LD.REPRES ENTATIVE SUBMITTED THAT THE PROFIT FROM SALE OF LAND AFTER ITS CONVERSION C AN BE ASSESSED AS BUSINESS INCOME. THE CIT(A) HAS TAKEN THE GAIN ON C ONVERSION OF AGRICULTURAL LAND INTO STOCK IN TRADE AS SHORT TERM CAPITAL GAIN IGNORING THE PROVISIONS OF SECTION 45(2) OF THE ACT. ACCORDING TO THE LD.REPRESENTATIVE, THE CAPITAL ASSET, VIZ. THE AGRICULTURAL LAND WAS C ONVERTED INTO STOCK IN TRADE, THERE CANNOT BE ANY TAX ON THE CAPITAL GAIN. THE LD.REPRESENTATIVE PLACED HIS RELIANCE ON THE JUDGMENT OF THE CALCUTTA HIGH COURT IN CIT VS 4 ITA NO.270, 304 & 305 & 350-COCH-2014 BOHRAT TEA CO LTD (12982) 138 ITR 783. ACCORDING T O THE LD.REPRESENTATIVE, THE CAPITAL GAIN IF AT ALL TO BE CHARGED HAS TO BE CHARGED IN THE YEAR IN WHICH THE PROPERTY WAS SOLD AFTER CO NVERSION. THE CONVERSION ITSELF CANNOT BE TREATED AS SALE OF LAND . 4. ON THE CONTRARY, SHRI K.K. JOHN, THE LD.DR SUBMI TTED THAT THE ASSESSEE ADMITTEDLY PURCHASED THE LAND FOR THE PURP OSE OF EXPANTION OF ITS FACTORY. IT IS NOT THE INTENTION OF THE ASSESSEE T O CARRY OUT ANY AGRICULTURAL OPERATION. THE LD.DR SUBMITTED THAT WHAT WAS PURCH ASED BY THE ASSESSEE IS A RUBBER PLANTATION. AFTER PURCHASING, THE ASSE SSEE STARTED TAPPING FOR THE PURPOSE OF PUTTING UP THE FACTORY. THE INCOME OF RS.2.5 LAKHS SAID TO BE RETURNED IN THE RETURN OF INCOME IS ONLY FROM SL AUGHTER TAPPING AND NOT FROM A ANY AGRICULTURAL ACTIVITY. THEREFORE, ACCORD ING TO THE LD.DR, SLAUGHTER TAPPING IS A PROCESS OF REMOVAL OF THE EX ISTING RUBBER TREES FOR THE PURPOSE OF CONVERTING THE LAND INTO A FACTORY S ITE. THOUGH THE ASSESSEE PURCHASED THE RUBBER PLANTATION, WHICH MAY BE AN AGRICULTURAL LAND, THE ASSESSEE NEVER USED THE LAND FOR AGRICULT URAL ACTIVITY. INSTEAD OF EXPANDING THE FACTORY, THE ASSESSEE DIVIDED THE LAN D INTO A HOUSING SITE FOR THE PURPOSE OF PROMOTING VILLA PROJECT. IN FACT, P ART OF THE LAND WAS SOLD IN THE ASSESSMENT YEAR 2007-08. ACCORDING TO THE LD.D R, EVEN THOUGH THE LAND WAS SITUATED IN THE VILLAGE PANCHAYAT, THE ASS ESSEE PURCHASED THE LAND AND REMOVED THE EXISTING RUBBER PLANTATION FOR THE PURPOSE OF 5 ITA NO.270, 304 & 305 & 350-COCH-2014 EXPANSION OF FACTORY, THEREAFTER THE SAME WAS CONVE RTED INTO HOUSING SITE. THE LAND WAS DIVIDED INTO HOUSING SITES AND THE SAM E WAS SOLD. AFTER PURCHASE OF THE LAND, THE LAND WAS CONVERTED INTO S TOCK IN TRADE IN THE BOOKS OF ACCOUNT AND THE SAME WAS SOLD TO SEVERAL P EOPLE. THEREFORE, ACCORDING TO THE LD.DR, U/S 45(2), CONVERSION OF CA PITAL ASSET INTO STOCK IN TRADE IS CHARGEABLE TO CAPITAL GAIN IN THE YEAR IN WHICH THE SAME WAS CONVERTED. ON SALE OF THE LAND, THE ASSESSEE IS LI ABLE TO PAY TAX ON THE INCOME AS BUSINESS INCOME. THEREFORE, ACCORDING TO THE LD.DR, THE CIT(A) RIGHTLY CONFIRMED THE ORDERS OF THE ASSESSING OFFIC ER FOR THE ASSESSMENT YEARS 2007-08, 2008-09 AND 2009-10. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSEE CLAIMS THAT IT PURCHASED 512 CENTS OF AGRICULTURAL LAND FOR THE PU RPOSE OF EXPANSION OF ITS FACTORY. IT IS NOT IN DISPUTE THAT IT WAS A RUBBER PLANTATION. THE ASSESSEE CLAIMS THAT AN INCOME OF RS.2,50,000 WAS RETURNED A S AGRICULTURAL INCOME FROM THE AGRICULTURAL ACTIVITY. FROM THE MATERIAL AVAILABLE ON RECORD IT APPEARS THAT A RESOLUTION WAS PASSED ON 15-03-2005 FOR PURCHASE OF 512 CENTS OF LAND FOR EXPANSION OF THE FACTORY. AS PER THIS RESOLUTION, THE LAND WAS PURCHASED ON 29-03-2005. WITHIN A PERIOD OF SI X MONTHS, I.E. ON 19- 09-2006 ANOTHER RESOLUTION WAS PASSED TO CONVERT TH E LAND INTO RESIDENTIAL PLOTS. MOREOVER, THE MEMORANDUM OF UNDERSTANDING O F THE COMPANY WAS 6 ITA NO.270, 304 & 305 & 350-COCH-2014 ALSO AMENDED SO AS TO ENABLE THE COMPANY TO CARRY O N BUSINESS IN REAL ESTATE. ON 27-03-2007 THE ASSESSEE SOLD 188 CENTS OF LAND TO VARIOUS PARTIES AND ALSO ENTERED INTO AGREEMENT FOR CONSTRU CTION OF BUILDING IN THE SAID LAND. THEREFORE, AS ON 27-03-2007 THE ASSESSE E IS NOT THE OWNER OF THE LAND; AT LEAST FOR 188 CENTS OF LAND. IT IS NO T KNOWN WHEN THE REMAINING PORTION OF THE LAND WAS SOLD BY THE ASSESSEE TO OTH ER PERSONS. THE FIRST QUESTION ARISES FOR CONSIDERATION IS WHETHER THE LA ND WHICH WAS CONVERTED BY THE ASSESSEE INTO STOCK IN TRADE IS AN AGRICULTU RAL LAND OR NOT? THE ASSESSEE MAINLY PLACE RELIANCE ON THE CERTIFICATE I SSUED BY THE VILLAGE OFFICER, THE TRANSLATED COPY OF WHICH IS AVAILABLE AT PAGE 3 OF THE PAPER, WHICH READS AS FOLLOWS: CERTIFICATE THIS IS TO CERTIFY THAT THE PROPERTY LYING IN BLOCK 45, RESURVEY NOS.324/1, 324/2, 324/3 & 324/4 OF AIKKARANADU NORT H VILLAGE, KADAYIRUPPU KARA HELD FOR AND ON BEHALF OF SYNTHITE INDUSTRIAL CHEMICALS LTD BY ITS MANAGING DIRECTOR MR. C.V. JAC OB, S/O VARKEY, NECHUPADOM, KADAYIRUPPU AS PER VILLAGE RECO RDS 56/6 IS AGRICULTURAL LAND (NILAM) AND THAT IT IS BE ING USED FOR AGRICULTURAL OPERATIONS. THIS CERTIFICATE IS ISSUED FOR PRODUCING IT BEFORE THE INCOME TAX OFFICE, ERNAKULAM. SD/- WITH DATE 20/10/10 KADAYIRUPPU VILLAGE OFFICER 20-10-2010 AIKKAANADU NORTH 7 ITA NO.270, 304 & 305 & 350-COCH-2014 6. FROM THE ABOVE CERTIFICATE IT APPEARS THAT THE L AND IN RE-SURVEY NOS 324/1, 324/2, 324/3 & 324/4 WAS OWNED BY THE ASSESS EE COMPANY AND THE SAME WAS AGRICULTURAL LAND AND USED FOR AGRICULTURA L PURPOSE. THE CERTIFICATE WAS ADMITTEDLY ISSUED ON 20-10-2010 BY VILLAGE OFFICER, AIKKARANADU NORTH VILLAGE. HOWEVER, FROM THE RESOL UTION SAID TO BE PASSED BY THE ASSESSEE COMPANY ON 19-09-2006 AS EXTRACTED BY THE CIT(A) SAYS THAT THE LAND WAS SITUATED AT RESURVEY NOS. 299/4, 324/2, 324/3, 324/5, 324/1, 324/6 AND 299/2 OF AIKKARANADU NORTH VILLAGE . THE VILLAGE OFFICER CERTIFIES ONLY RESURVEY NOS. 324/1, 324/2, 324/3 & 324/4 BELONGING TO THE ASSESSEE AND IT WAS AGRICULTURAL LAND. IN RESPECT OF LAND IN RESURVEY NOS.299/4, 299/2, 324/5 AND 324/6 THERE IS NO MATER IAL AVAILABLE ON RECORD TO SUGGEST THAT IT WAS AGRICULTURAL LAND. THE RESU RVEY NOS. 299/4, 324/5, 324/6 AND 299/2 ARE OMITTED IN THE CERTIFICATE SAID TO BE ISSUED BY THE VILLAGE OFFICER. FURTHERMORE, THE ADMITTED CASE OF THE ASSESSEE IS THAT PART OF THE LAND TO THE EXTENT OF 188 CENTS OF AND WAS S OLD TO VARIOUS PERSONS ON 27-03-2007. IF THAT IS SO, IT IS NOT KNOWN WHI CH SURVEY NUMBER OF THE LAND THAT WAS SAID TO BE SOLD. IF ANY PART OF THE LAND IS SOLD IN RESURVEY NOS. 324/1, 324/2, 324/3 & 324/4 THEN THE ASSESSEE CANNOT OWN THE ENTIRE LAND AS ON 20-10-2010 WHEN THE VILLAGE OFFICER ISSU ED THE CERTIFICATE. IF THAT IS SO, IT IS NOT KNOWN UNDER WHAT CAPACITY THE VILL AGE OFFICER ISSUED THE CERTIFICATE SAYING THAT THE LAND BELONGS TO THE ASS ESSEE COMPANY AND IT 8 ITA NO.270, 304 & 305 & 350-COCH-2014 WAS AGRICULTURAL LAND USED FOR AGRICULTURAL PURPOSE . THE LAND ADMITTEDLY WAS CONVERTED INTO STOCK IN TRADE BY DIVIDING THE S AME INTO RESIDENTIAL PLOTS AND THE BASIS OF THE RESOLUTION DATED 19-09-2006, I .E. WITHIN A PERIOD OF SIX MONTHS FROM THE DATE OF THE PURCHASE. THEREFORE, T HE USAGE AND PURPOSE OF THE LAND WAS CONVERTED AND CHANGED INTO NON AGRI CULTURAL PURPOSE. MOREOVER, THERE WAS A CONFUSION AS TO WHICH PART OF THE LAND WAS SOLD AS ON 27-03-207. IT IS ALSO NOT KNOWN WHETHER THE OTH ER PART OF THE LAND SOLD TO OTHER PERSONS FOR THE PURPOSE OF CONSTRUCTING VI LLAS. THE ADMITTED FACT IS THAT 188 CENTS OF LAND WAS SOLD TO VARIOUS PERSONS AND AN AGREEMENT WAS ENTERED INTO FOR CONSTRUCTION OF VILLAS. THEREFORE , IT HAS TO BE ASCERTAINED WHAT HAPPENED TO THE REMAINING PART OF THE LAND AFT ER ITS CONVERSION. THE FACT REMAINS IS THAT ENTIRE 512 CENTS OF LAND WAS C ONVERTED INTO RESIDENTIAL PLOTS ON THE BASIS OF THE RESOLUTION PASSED ON 19-0 9-2006. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE CERT IFICATE ISSUED BY THE VILLAGE OFFICER GOES AGAINST THE FACT ADMITTED BY T HE ASSESSEE. SINCE THE ASSESSEE ITSELF ADMITS THAT THE LAND WAS CONVERTED INTO HOUSING PLOTS AS ON 19-09-2006 THE SAME CANNOT REMAIN AS AGRICULTURAL L AND FOR ANY LONGER. IN OTHER WORDS, THE PURPOSE AND USAGE OF THE LAND WAS CONVERTED INTO NON AGRICULTURAL LAND AS ON 19-06-2006 AND PART OF THE LAND WAS SOLD AS ON 27- 03-2007. THEREFORE, THIS TRIBUNAL IS OF THE CONSID ERED OPINION THAT WHEN THE ASSESSEE ITSELF CLAIMS THAT THE LAND WAS CONVER TED INTO NON AGRICULTURAL LAND AS ON 19-06-2006 IT CANNOT CONTINUE AS AGRICUL TURAL LAND ANY FURTHER. 9 ITA NO.270, 304 & 305 & 350-COCH-2014 THEREFORE, THE CERTIFICATE SAID TO BE ISSUED BY THE VILLAGE OFFICER HAS NO RELEVANCE IN VIEW OF THE FACTS ADMITTED BY THE ASSE SSEE. HENCE, THERE IS NO JUSTIFICATION IN THE CLAIM OF THE ASSESSEE THAT THE LAND IS AN AGRICULTURAL LAND. THIS TRIBUNAL IS OF THE CONSIDERED OPINION T HAT THE SUBJECT LAND IS NOT AN AGRICULTURAL LAND. 7. NOW COMING TO THE ISSUE OF CAPITAL GAIN, ADMITTE DLY, THE LAND WAS CONVERTED INTO STOCK IN TRADE BY RESOLUTION DATED 1 9-09-2006 WHICH FALLS IN THE ASSESSMENT YEAR 2007-08. WE HAVE CAREFULLY GON E THROUGH THE PROVISIONS OF SECTION 45(2) OF THE ACT WHICH READS AS FOLLOWS: (2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECT ION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY W AY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CA RRIED 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 PURPOSE OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVE RSION OR TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF T HE CONSIDERATION RECEIVED OR ACCRUING S A RESULT OF TH E TRANSFER OF THE CAPITAL ASSET. IN VIEW OF THE ABOVE, WHEN THE CAPITAL ASSET WAS CO NVERTED INTO STOCK IN TRADE BY THE OWNER, THE PROFITS OR GAINS ARISING FR OM SUCH TRANSFER SHALL BE 10 ITA NO.270, 304 & 305 & 350-COCH-2014 CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVI OUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM. 8. THE QUESTION ARISES FOR CONSIDERATION IS - WHIC H IS THE YEAR IN WHICH THE CAPITAL GAIN HAS TO BE CHARGED? WHETHER, THE Y EAR IN WHICH THE CONVERSION WAS MADE OR THE YEAR IN WHICH THE LAND W AS SOLD AFTER THE SAME WAS CONVERTED INTO STOCK-IN-TRADE? THE CLAIM OF THE ASSESSEE IS THAT IN VIEW OF THE LANGUAGE EMPLOYED BY THE LEGISLATURE , THE CAPITAL GAIN, IF ANY, HAS TO BE CHARGED ONLY IN THE YEAR IN WHICH THE LAN D WAS SOLD. HOWEVER, THE DEPARTMENT CLAIMS THAT THE SAME HAS TO BE CHARG ED IN THE YEAR IN WHICH THE LAND WAS CONVERTED INTO STOCK-IN-TRADE. WE FIND THAT THE KERALA HIGH COURT HAD AN OCCASION TO CONSIDER A SIMILAR IS SUE IN CIT VS NATIONAL TYRES & RUBBER CO LTD (2011) 202 TAXMAN 625 (KER). AFTER CONSIDERING SECTION 45(2), THE KERALA HIGH COURT FOUND THAT THE LAND WAS CONVERTED INTO STOCK IN TRADE WHICH RESULT HUGE PROFIT TO THE ASSE SSEE U/S 45(2) AND THE LAND WAS SOLD IN THREE ASSESSMENT YEARS. THE KERAL A HIGH COURT FOUND THAT BY VIRTUE OF SECTION 45(2), THE CAPITAL GAIN S HALL BE CHARGED IN RESPECT OF THE ASSESSMENT YEAR IN WHICH THE LAND WAS SOLD A FTER ITS CONVERSION. IN FACT, THE KERALA HIGH COURT HAS OBSERVED AS FOLLOW S AT PARAGRAPHS 4 & 5 OF THE JUDGMENT: 11 ITA NO.270, 304 & 305 & 350-COCH-2014 4. THE SHORT QUESTION THAT ARISES FOR OUR CONSIDER ATION IS WHETHER REASSESSMENT COMPLETED UNDER S. 147 IS NOT TENABLE S HELD BY THE CIT(A) AND CONFIRMED BY THE TRIBUNAL. IN ORDER TO CONSIDER THE VALIDITY OF REASSESSMENT WE HAVE TO NECESSARILY CONSIDER THE NATURE OF THE INCOME THAT ESCAPED ASSESSMENT IN THE REGULAR ASSESSMENT COMPLETED UNDE R S.143(3) OF THE ACT. SEC.45(2) WHICH IS THE SOLE B ASIS OF REASSESSMENT UNDER S.147 IS EXTRACTED HEREUNDER FOR EASY REFERENCE: 45(2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-S. (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY O F CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATM ENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM SHAL L BE CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVI OUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE T RANSFERRED BY HIM AND, FOR THE PURPOSES OF S.48, THE FIR MARKET V ALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT S HALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. 5. WHAT IS CLEAR FROM THE ABOVE IS THAT TRANSFER OR CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE WIL L ATTRACT TAX UNDER CAPITAL GAINS AND LIABILITY ARISES IN THE YEA R IN WHICH THE STOCK-IN-TRADE AFTER CONVERSION IS SOLD. IN THIS C ASE, ADMITTEDLY THE ASSESSEE CONVERTED THE FIXED ASSETS HELD IN THE FORM OF LAND INTO STOCK-IN-TRADE IN THE ASST.YR.1992-93 AND SINCE THE LAND WHICH HAD THE BOOK VALUE OF ONLY RS.1,52,909 W AS REVALUED AT RS.18 LAKHS AND PROFIT OF RS.16,47,091 WAS 12 ITA NO.270, 304 & 305 & 350-COCH-2014 CREDITED IN THE GENERAL RESERVE, THE CONVERSION OF LAND INTO STOCK-IN-TRADE WHICH RESULTED IN HUGE PROFIT TO THE ASSESSEE WAS ASSESSABLE TO TAX UNDER S.45(2) FOR THE PREVIOU S YEAR RELEVANT FOR THE ASSESSMENT YEAR IN WHICH THE LAND WAS SOLD. ADMITTEDLY, THE LAND IN PIECES WERE SOLD IN THE COU RSE OF THREE3 QSST.YRS.1993-94, 1994-95 AND 1995-96. BY V IRTUE OF THE OPERATION OF S.45(2), THE SHOULD HAVE CHARGED TAXABLE CAPITAL GAINS UNDER S.45(2) IN RESPECT OF THE LAND SOLD IN EACH OF THE ASSESSMENT YEARS. HOWEVER, ASSESSMENTS FOR 1 993-94 AND 1994-95 ARE NOT SEEN REOPENED PROBABLY ON ACCOU NT OF LIMITATION. WHEN OBJECTION WAS RAISED BY THE AUDIT PARTY, THE AO REOPENED THE ASSESSMENT FOR THE AST.YR.1995-96, THE PREVIOUS YEAR OF WHICH MAIN PORTION OF THE LAND WIT H BUILDING THEREON WAS SOLD BY THE ASSESSEE, AND BROUGHT TO TA X THE CAPITAL GAIN ATTRIBUTABLE TO SUCH LAND ASSESSABLE U NDER S.45(2) OF THE ACT. IN VIEW OF THE ABOVE, THE CAPITAL GAIN, IF ANY, HAS TO BE CHARGED ONLY IN THE YEAR IN WHICH THE ASSESSEE HAS SOLD THE LAND AFTER CONVERSION OF THE SAME INTO STOCK IN TRADE. IN THE CASE ON HAND, THE ASSE SSEE CLAIMS THAT ONLY 188 CENTS OF AND WAS SOLD IN THE ASSESSMENT YEAR 2007-0 8. NO MATERIAL IS AVAILABLE ON RECORD IN RESPECT OF THE YEAR IN WHICH THE REMAINING LAND WAS SOLD. THEREFORE, THE ASSESSING OFFICER HAS TO ASCE RTAIN WHEN THE REMAINING PORTION OF THE LAND WAS ACTUALLY SOLD AFTER THE SAM E WAS CONVERTED INTO STOCK IN TRADE. THE CAPITAL GAIN SHALL BE CHARGED IN THE YEAR IN WHICH THE LAND WAS SOLD AFTER CONVERSION INTO STOCK IN TRADE. ACCORDINGLY, THE ORDERS 13 ITA NO.270, 304 & 305 & 350-COCH-2014 OF THE LOWER AUTHORITIES TO THAT EXTENT IS SET ASID E AND THE ISSUE OF CHARGING CAPITAL GAIN IS REMITTED BACK TO THE FILE OF THE AS SESSING OFFICER. THE ASSESSING OFFICER SHALL FIND OUT THE ASSESSMENT YEA RS IN WHICH THE LAND WAS ACTUALLY SOLD AFTER THE SAME WAS CONVERTED INTO STO CK IN TRADE AND BRING THE PROFIT ON CONVERSION OF THE LAND INTO STOCK IN TRAD E TO CAPITAL GAIN IN THE ASSESSMENT YEARS IN WHICH THE LAND WAS ACTUALLY SOL D. APART FROM THE CAPITAL GAIN, THE PROFIT ON SALE OF THE LAND AFTER ITS CONVERSION SHALL ALSO BE CHARGEABLE TO TAX AS BUSINESS INCOME IN THE YEAR IN WHICH THE LAND WAS SOLD. THEREFORE, THE ASSESSING OFFICER SHALL ASCER TAIN THE YEAR IN WHICH THE LAND WAS SOLD AND BRING THE PROFIT ON SALE OF LAND ALSO AS BUSINESS. 9. NOW COMING TO THE DEPARTMENTAL APPEAL FOR THE AS SESSMENT YEAR 2008-09, THE ONLY ISSUE IS WITH REGARD TO DISALLOWA NCE MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT R.W.R. 8D OF T HE I.T. RULES, 1962. 10. SHRI K.K. JOHN, THE LD.DR SUBMITTED THAT THE AS SESSEE CLAIMED BEFORE THE TRIBUNAL FOR THE FIRST TIME THAT IT HAS SUFFICIENT CAPITAL AND RESERVES. IT IS NOT KNOWN WHETHER THE ENTIRE CAPIT AL / RESERVE IS AVAILABLE WITH THE ASSESSEE AS LIQUID CASH OR IT WAS INVESTME NT IN FIXED ASSETS. IF THE CAPITAL AND RESERVES ARE INVESTED IN FIXED ASSETS, THEN TO THAT EXTENT CAPITAL MAY NOT BE AVAILABLE FOR THE ASSESSEE FOR MAKING IN VESTMENT IN EXEMPTED INCOME. IT IS TRUE THAT RULE 8D WAS INTRODUCED ONL Y IN THE ASSESSMENT YEAR 14 ITA NO.270, 304 & 305 & 350-COCH-2014 2008-09, BUT EVEN OTHERWISE, THE ASSESSEE CANNOT CL AIM ANY EXPENDITURE FOR EARNING THE EXEMPTED INCOME. ACCORDING TO THE LD.DR UNDER THE INCOME-TAX ACT WHAT IS ALLOWABLE AS EXPENDITURE IS ONLY THE EXPENDITURE INCURRED IN CONNECTION WITH EARNING INCOME WHICH IS TAXABLE. IF ANY INCOME IS NOT SUBJECTED TO INCOME-TAX UNDER THE INCOME-TAX ACT, 1961, THEN THE EXPENDITURE INCURRED FOR EARNING THAT PART OF INCOM E HAS TO BE IGNORED. THEREFORE, IT IS FOR THE ASSESSEE, ACCORDING TO THE LD.DR, TO ESTABLISH THAT SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE FOR MAKING INVESTMENT TO EARN INCOME WHICH WAS EXEMPTED FROM T AXATION. 11. ON THE CONTRARY, SHRI THOMSON THOMAS, THE LD.RE PRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER DISAL LOWED RS.1,88,63,289 FOR THE ASSESSMENT YEAR 2008-09. A SIMILAR DISALLO WANCE WAS MADE IN RESPECT OF INTEREST, BANK CHARGES, ETC. ON THE GROU ND THAT THE BORROWED FUNDS WERE USED FOR EARNING EXEMPT INCOME. ACCORDI NG TO THE LD.REPRESENTATIVE, THE ASSESSEE HAS SUFFICIENT CAPI TAL AND RESERVE AS PER THE AUDITED ACCOUNTS. WHEN THE ASSESSEE HAS SUFFIC IENT OWN FUNDS THAN WHAT WAS INVESTED FOR EARNING EXEMPTED INCOME, ACCO RDING TO THE LD.REPRESENTATIVE, THERE CANNOT BE ANY DISALLOWANCE . THE ASSESSEE HAS ALSO FILED COPIES OF THE BALANCE-SHEET TO CLAIM THA T SUFFICIENT OWN FUNDS ARE AVAILABLE. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT BANK CHARGES CANNOT BE SUBJECT MATTER OF DISALLOWANCE U/S 14A R. W.R. 8D OF THE IT RULES, 15 ITA NO.270, 304 & 305 & 350-COCH-2014 1962. ACCORDING TO THE LD.REPRESENTATIVE, RULE 8D WAS INTRODUCED WITH EFFECT FROM ASSESSMENT YEAR 2008-09, THEREFORE, IT CANNOT BE MADE APPLICABLE FOR ASSESSMENT YEAR 2007-08. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSING OFFICER DISALLOWED PART OF THE INTEREST AND BANK CHARGES ON THE BORROW ED FUNDS. THE CONTENTION OF THE ASSESSING OFFICER IS THAT THE ASS ESSEE USED BORROWED FUNDS FOR EARNING EXEMPTED INCOME, THEREFORE, THE I NTEREST PAID / PAYABLE ON THE BORROWED FUND IS NOT ALLOWABLE. THE ASSESSE E CLAIMS THAT SUFFICIENT OWN FUNDS ARE AVAILABLE. THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT IF THE ASSESSEE HAS SUFFICIENT LIQUID FUNDS OF ITS OWN THEN TO THAT EXTENT THE ASSESSEE MIGHT HAVE USED ITS OWN FUNDS FOR THE PURP OSE OF EARNING EXEMPTED INCOME. THEREFORE, THE QUESTION OF DISALL OWANCE OF INTEREST ON THAT PORTION OF FUNDS MAY NOT ARISE. HOWEVER, IT I S FOR THE ASSESSEE TO ESTABLISH THAT SUFFICIENT LIQUID FUNDS ARE AVAILABL E WITH THE ASSESSEE. IF ANY PART OF THE BORROWED FUNDS IS USED FOR EARNING EXEM PTED INCOME, THEN, THE PROPORTIONATE INTEREST ON THE SAME HAS TO BE DISALL OWED. SIMILARLY, APART FROM INTEREST, THE OTHER EXPENSES, IF ANY, CLAIMED BY THE ASSESSEE FOR THE PURPOSE OF EARNING THE EXEMPTED INCOME MAY ALSO NEE D TO BE DISALLOWED IRRESPECTIVE OF WHETHER IT IS FROM BORROWED FUNDS O R FROM OWN FUNDS. AS RIGHTLY CONTENDED BY THE LD.DR, THOUGH RULE 8D WAS INTRODUCED IN THE 16 ITA NO.270, 304 & 305 & 350-COCH-2014 STATUTE BOOK FROM ASSESSMENT YEAR 2008-09, THE INCO ME-TAX ACT DOES NOT PERMIT FOR ALLOWANCE OF ANY EXPENDITURE ON INCOME W HICH IS NOT CHARGEABLE TO TAX. THEREFORE, IRRESPECTIVE OF RULE 8D, THIS T RIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSESSEE CANNOT CLAIM A NY EXPENDITURE INCLUDING INTEREST ON BORROWED FUNDS FOR EARNING TH E EXEMPTED INCOME. SINCE THE AVAILABILITY OF THE LIQUID FUNDS NEEDS TO BE VERIFIED, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSESSING OFFICE R HAS TO EXAMINE THE SAME IN THE LIGHT OF THE CONTENTIONS RAISED BY THE ASSESSEE. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE A ND THE ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASS ESSING OFFICER SHALL RE- EXAMINE THE ISSUE WITH REGARD TO THE AVAILABILITY O F LIQUID FUNDS FOR MAKING INVESTMENTS FOR EARNING TAX FREE INCOME AS ALSO THE OTHER RELATED EXPENDITURE INCURRED FOR EARNING EXEMPTED INCOME IN THE LIGHT OF CONTENTIONS RAISED BY THE ASSESSEE BEFORE THIS TRIB UNAL AND THEREAFTER DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 13. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AND THE DEPARTMENTAL APPEAL IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 06 TH FEBRUARY, 2015. SD/- SD/- (CHANDRA POOJARI) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 06 TH FEBRUARY, 2015 PK/- 17 ITA NO.270, 304 & 305 & 350-COCH-2014 COPY TO: 1. THE DY.CIT, CIR.4(1), RANGE-4, KOCHI 2. M/S SYNTHITE INDUSTRIES LTD, AJAY VIHAR, ERNAKUL AM 3. THE COMMISSIONER OF INCOME-TAX, KOCHI 4. THE COMMISSIONER OF INCOME-TAX(A)-II, KOCHI 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH 18 ITA NO.270, 304 & 305 & 350-COCH-2014