DCIT 1(2), MUMBAI V. POLYCHEM LTD, MUMBAI

ITA 4177/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9102 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 19-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 20-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Assessee Lawyers: P PARDIWALA
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Cost of acquisition; Date of conversion; Fair market value; Valuation report; Competent authority
• Section: 45(2); 143(3); 50C; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 4177/MUM/2011 ASSESSMENT YEAR : 2007-08 A.C.I.T. 1(2) 5 TH FLOOR, AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. VS. M/S. POLYCHEM LTD. 7, JAMSHEDJI TATA ROAD CHURCHGATE RECLAMATION MUMBAI-400 020. PAN NO.AAACP 7184 M. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI A.C. TEJPAL RESPONDENT BY : SHRI P. PARDIWALA DATE OF HEARING : 19.11.2012 DATE OF PRONOUNCEMENT : 14.12.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDE R DATED 28.2.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. T HE ONLY DISPUTE RAISED IS REGARDING ADDITION ON ACCOUNT OF SHORT TERM CAPITAL GAIN ARISING OUT ON TRANSFER OF LAND. 2. THE FACTS IN BRIEF ARE THAT THE AO DURING THE ASSESSM ENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD SOLD PLOTS OF LAND BY TWO SEPARATE SALE DEEDS BOTH DATED 25.5.2006 FOR A CONSIDERA TION OF ITA NO.4177/M/11 A.Y. 07-08 2 RS.13,32,87,366/- AND RS.99,49,439/-. THE STAMP DUTY V ALUE OF THE PLOTS WERE RS.27,50,25,000/- AND RS.1,86,25,000/-. THE SE PLOTS HAD BEEN ACQUIRED BY THE ASSESSEE DURING THE PERIOD F.Y. 199 0-91 TO 2003-04 AS PER DETAILS GIVEN BELOW: YEAR OF PURCHASE OF THE PLOT (F.Y.) COST OF LAND REGISTRATION AND STAMP DUTY TOTAL COST 1990-91 61,60,741 2,79,373 64,40,114 1991-92 31,71,654 1,44,258 33,15,912 1992-93 20,76,664 92,095 21,68,759 1993-94 2,08,350 10,563 2,18,930 1994-95 12,000 1,286 13,286 1995-96 60,000 18,350 78,350 2001-02 3,65,000 19,938 3,84,936 2002-03 1,50,000 20,370 1,70,370 2003-04 20,000 - 20,000 TOTAL RS.1,28,10,657 2.1 THE ASSESSEE HAD ALSO INCURRED EXPENSES AGGREGATING TO RS.150.63 LACS AS PER DETAILS GIVEN BELOW : F.Y. NATURE OF EXPENSE AMOUNT (RS. IN LACS) 1994-95 LAND LEVELING EXPENSE 5.80 1994-95 BORING 0.65 1994-95 FENCING 7.41 1994-95 CONSULTING CHARGES, ADVERTISEMENT & MARKETING LEGAL FEES, TRAVELING AND HOTEL EXPENSES 36.27 1995-96 STAMP DUTY AND REGISTRATION 0.95 1996-97 LAND REVENUE 0.09 1996-97 LEGAL EXPENSE 0.05 1996-97 INTEREST CAPITALIZED 99.41 TOTAL RS.150.63 ITA NO.4177/M/11 A.Y. 07-08 3 2.2 THE ASSESSEE CLAIMED THAT THE LAND HAD BEEN CONVERTED INTO STOCK IN TRADE ON 31.3.2000. THE ASSESSEE, THEREFORE, COMP UTED THE CAPITAL GAIN BEING DIFFERENCE OF MARKET VALUE AS ON 31 .3.2000 AND COST OF ACQUISITION AS LONG TERM CAPITAL GAIN UNDER SECTION 45 (2) OF THE INCOME TAX ACT, 1961 (THE ACT). THE MARKET VALUE AS ON 31.3.2000 AS PER VALUERS REPORT WAS RS.3.54 CRORES AND INDEXED COST OF ACQUISITION WAS RS.404.19 LACS. THE ASSESSEE THUS DECLARED LONG TERM CAP ITAL LOSS OF RS.50,19,320/-. THE BALANCE GAIN BEING SALE PRICE MI NUS MARKET VALUE AS ON 31.3.2000 WAS DECLARED AS BUSINESS INCOME UNDER THE PROVISIONS OF SECTION 45(2). 2.3 THE AO NOTED THAT THE LAND HAD BEEN ACQUIRED BY THE ASSESSEE FROM THE GOVERNMENT OF MAHARASHTRA UNDER SECTION 43 AN D SECTION 63 OF BOMBAY TENANCY & AGRICULTURAL LANDS ACT, 1958 WITH THE FOLLOWING CONDITIONS: I) THE LAND SHALL BE USED FOR BONAFIDE NON-AGRICULTURAL PURPOSES ONLY I.E., FOR INDUSTRIAL PURPOSES; II) THE ASSESSEE SHALL TAKE NECESSARY N.A. (NON-AGRICULTURAL) PERMISSION FROM THE COMPETENT REVENUE AUTHORITIES; III) THE ASSESSEE SHALL USE LAND FOR STIPULATED PURPOSE I.E., FO R INDUSTRIAL USE WITHIN THE STIPULATED TIME IV) BREACH OF ANY OF THE CONDITIONS SHALL RESULT IN CANCELLAT ION OF THE PERMISSION AND FORFEITURE OF THE LAND. ITA NO.4177/M/11 A.Y. 07-08 4 2.4 THE AO FURTHER NOTED THAT ON FAILURE OF THE ASSESSE E TO UTILIZE LAND FOR INDUSTRIAL PURPOSE WITHIN THE STIPULATED TIM E, THE ASSESSEE HAD TAKEN EXTENSIONS FROM REVENUE AUTHORITIES FROM TIME TO TIME. LAST EXTENSION HAD BEEN ALLOWED VIDE ORDER DATED 20.2.200 2 OF THE SDO UP TO 20.2.2003 WITH THE CONDITION THAT LAND SHALL B E USED FOR INDUSTRIAL PURPOSE BEFORE 20.2.2003. THE LAND WAS CON VERTED FROM AGRICULTURAL LAND INTO NON-AGRICULTURAL LAND VIDE ORD ER DATED 27.5.2004 OF THE COLLECTOR, DIST. RAIGAD. THEREAFTER THE ASSESSEE O BTAINED NO OBJECTION CERTIFICATE FROM THE COLLECTOR VIDE ORDER DAT E 29.4.2006 FOR SALE OF LAND. THE CONDITIONS TO USE THE LAND FOR INDUST RIAL PURPOSES HOWEVER REMAINED. THE AO OBSERVED THAT THE LAND REMA INED AGRICULTURAL LAND TILL IT WAS CONVERTED INTO NONAGRICU LTURAL LAND ON 27.5.2004. THEREFORE, THERE WAS NO CAPITAL ASSET AS ON 3 1.3.2000 WHICH COULD HAVE BEEN CONVERTED BY THE ASSESSEE INTO STOCK-I N-TRADE BECAUSE AGRICULTURAL LAND WAS NOT A CAPITAL ASSET. THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY CONVERSION OF AGRICU LTURAL LAND INTO STOCK-IN-TRADE BY THE ASSESSEE AS ON 31.3.2000 SHOULD NOT BE TREATED AS VOID ABINITIO. THE AO ALSO ASKED THE ASSESSEE T O EXPLAIN AS TO HOW IT WAS POSSIBLE TO CONVERT THE SAID LAND INTO STOCK -IN-TRADE WHEN THERE WAS COVENANT IN RESPECT OF USER OF LAND. ITA NO.4177/M/11 A.Y. 07-08 5 2.5 THE ASSESSEE EXPLAINED THAT THE ASSESSEE HAD NEVER BO UGHT ANY AGRICULTURAL LAND AS LAND ACQUIRED WAS ALWAYS MEANT FOR INDUSTRIAL USE. THE FINAL USE OF THE LAND EVEN AFTER CONVERSION TO NON -AGRICULTURAL WAS ACTUALLY FOR INDUSTRIAL PURPOSES. THE ASSESSEE HAD CONVERTE D THE LAND INTO STOCK-IN-TRADE WITH A VIEW TO COMMERCIALLY EXPLOIT THE LAND AND SUCH CONVERSION COULD NOT BE CONSIDERED AS VOID. THE CONVERSI ON INTO STOCK-IN-TRADE HAD BEEN ACCEPTED BY THE AO IN THE CURREN T ASSESSMENT UNDER SECTION 143(3) FOR ASSESSMENT YEAR 2000-01 AND THE REAFTER ALL ALONG THE LAND HAD BEEN SHOWN AS STOCK-IN-TRADE AND ACCEP TED IN ASSESSMENTS UPTO ASSESSMENT YEAR 2006-07. IT WAS, THEREFORE , NOT PROPER FOR THE AO TO QUESTION THE CONVERSION ALREADY ACCEPTED IN ASSESSMENT YEAR 2000-01. THE ASSESSEE FURTHER SUBMITTED THO UGH THE AUTHORITIES PERMITTED THE USE FOR INDUSTRIAL PURPOSE, IT DID NOT MEAN THAT THE ASSESSEE COULD NOT CARRY ON INDUSTRIAL ACTIVITIES. THE ASSESSEE CONVERTED LAND INTO STOCK-IN-TRADE TO CARRY OUT REAL EST ATE DEVELOPMENT FOR PROVIDING THE PROPERTY FOR BUYERS FOR INDUSTRIAL PURPOSES. IT WAS POINTED OUT THAT INCIDENT OF TRANSFER UPON CONVERSION HAPPENED IN THE YEAR OF CONVERSION WHICH HAD BECOME FINAL AND ONLY TAXA BILITY WAS TO BE CONSIDERED IN THE YEAR OF SALE. 2.6 THE AO HOWEVER, DID NOT ACCEPT THE CONTENTIONS RA ISED. IT WAS OBSERVED BY HIM THAT THE LAND WAS MEANT FOR INDUSTRIA L USE WHICH HAD ITA NO.4177/M/11 A.Y. 07-08 6 BEEN CONVERTED BY ASSESSEE INTO STOCK-IN-TRADE ILLEGALLY AS ASSESSEE HAD NEITHER RIGHT TO CHANGE USAGE OF LAND OR SELL THE LAND. THEREFORE, CONVERSION WAS VOID ABINITIO AND A NULLITY. THE CONVE RSION HAD ALSO BEEN MADE WITHOUT PERMISSION OF THE GOVERNMENT. MOR EOVER, THERE WERE NO CAPITAL ASSET ON THE DATE OF CONVERSION WHICH COUL D BE CONVERTED INTO STOCK-IN-TRADE. THE AO, THEREFORE, HEL D THAT THE CONVERSION WAS NULL AND VOID AND HAD TO BE IGNORED. 2.7 AS REGARDS THE ARGUMENT OF THE ASSESSEE THAT THE CONVE RSION HAD BEEN ACCEPTED IN ASSESSMENT YEAR 2000-01 BY THE AO, I T WAS OBSERVED BY HIM THAT THE ASSESSMENT HAD BEEN ACCEPTED UNDE R SECTION 143(1)(A) AND NOT UNDER SECTION 143 (3). SUBSEQUENTLY , ASSESSMENT WAS RE-OPENED FOR LIMITED PURPOSE OF RE-EXAMINING THE IN CORRECT SET OFF OF BROUGHT FORWARD LOSS AGAINST CAPITAL GAIN. THE REFORE, IN THE RE- ASSESSMENT, THE AO WAS NOT REQUIRED TO EXAMINE THE CONVER SION AS THE SAME HAD NO EFFECT ON THE COMPUTATION OF THE INCOME . THE CONVERSION WAS THUS NEVER EXAMINED AND THEREFORE, IT CAN NOT BE SAID THAT THE AO HAD ACCEPTED THE SAME. THE AO FURTHER OBSE RVED THAT THE LAND BECAME CAPITAL ASSET ONLY ON 27.5.2004 AND SOON THE REAFTER IT WAS SOLD ON 25.5.2006 AND THEREFORE, CAPITAL ASSET HAD B EEN HELD FOR LESS THAN THREE YEARS. ACCORDINGLY, HE HELD THAT THE GAI N HAD TO BE ASSESSED AS SHORT TERM CAPITAL GAIN. THE AO NOTED THAT THE SALE CONSIDERATION DECLARED IN AGREEMENT IN RESPECT OF LAND A S MENTIONED ITA NO.4177/M/11 A.Y. 07-08 7 EARLIER WAS MUCH LOWER THAN THE VALUE ASSESSED BY STAMP D UTY AUTHORITIES AND THEREFORE, FOR THE PURPOSE OF COMPUTAT ION OF CAPITAL GAIN STAMP DUTY VALUE HAD TO BE ADOPTED UNDER SECTION 50C OF THE ACT. THE ASSESSEE OBJECTED TO THE PROPOSAL OF AO FOR ADOPTING STAMP DUTY VALUE ON THE GROUND THAT THE SAID VALUE WAS MUCH HIGHE R THAN MARKET VALUE AND REQUESTED THAT THE MATTER BE REFERRED TO V ALUATION OFFICER. THE AO, THEREFORE, REFERRED THE MATTER TO THE DVO U NDER SECTION 50C (2). SINCE THE REPORT OF THE DVO HAD NOT BEEN RECEIVE D ON THE DATE OF PASSING OF THE ORDER BY THE AO, HE ADOPTED STAMP DUTY VALUE FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN WITH THE OBSERVA TION THAT REMEDIAL MEASURES WOULD BE TAKEN ON RECEIPT OF REPORT OF DVO. AS REGARDS THE COST OF ACQUISITION, THE AO OBSERVED THAT COST SHOWN BY THE ASSESSEE OF RS.2,72,92,000/- ALSO INCLUDED INTEREST CAPI TALIZED OF RS.99,41,000/-. HE, THEREFORE EXCLUDED INTEREST COST AND COMPUTED COST OF ACQUISITION AT RS.1,73,57,000/- AND SHORT TERM CA PITAL GAIN WAS COMPUTED AT RS.27,62,93,000/-. 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED B EFORE CIT(A) THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SPECIALIZED CHEMICALS AND IN DEVELOPME NT OF REAL ESTATE. IT ALSO SUBMITTED THAT THE REAL ESTATE BUSINESS HAD BEEN STARTED BY IT SINCE 1994 IN WHICH YEAR THE ASSESSEE HAD CON TRIBUTED LAND AT MALAD AS ITS SHARE OF CAPITAL IN PARTNERSHIP FIR M KNOWN AS ITA NO.4177/M/11 A.Y. 07-08 8 BOMBAY PROPERTIES, A PROPERTY WHICH WAS SUBSEQUENTLY DEVELOPED AND SOLD IN 1997. THE ASSESSEE CONVERTED OTHER LANDS SITU ATED AT GORGEAON INTO STOCK-IN-TRADE AND HAD ENTERED INTO A J OINT VENTURE WITH MAHINDRA REALITIES & INFRASTRUCTURE DEVELOPERS AND PROF IT DERIVED THERE FROM HAD BEEN DECLARED AS BUSINESS INCOME. THEREAFTER ON 31.3.2000 THE ASSESSEE CONVERTED LAND UNDER CONSIDERATION INTO STOCK- IN-TRADE WITH A VIEW TO DEVELOP THE SAME COMMERCIALLY IN PURSUAN CE OF BOARD RESOLUTION. THE CONVERSION OF LAND INTO STOCK-IN-TRADE WAS DULY MENTIONED IN THE NOTES TO THE ACCOUNTS FOR THE YEAR END ED 31.3.2000 AND THE DIFFERENCE OF COST AND MARKET VALUE ON THE DAT E OF CONVERSION HAD BEEN CREDITED TO THE CAPITAL RESERVED. THE CONVERSIO N HAD BEEN ACCEPTED BY THE AO AFTER SCRUTINY UNDER SECTION 143(3) IN ASSESSMENT YEAR 2000-01. THE ASSESSEE THEREFORE SUBMITTED THAT THE GAIN HAD TO BE COMPUTED UNDER SECTION 45(2) PARTLY AS CAPITAL GAIN A ND PARTLY AS PROFIT OF BUSINESS. 3.1 AS REGARDS THE ARGUMENT OF AO THAT THE LAND REMA INED AGRICULTURAL LAND TILL IT WAS CONVERTED ON 27.5.2004, THE ASSESSEE SUBMITTED THAT THE LAND WAS UNDER INDUSTRIAL ZONE AND, THEREFORE, THE ASSESSEE WAS NEITHER CAPABLE NOR AUTHORIZED TO USE THE SAME FOR AGRICULTURAL PURPOSES NOR ANY AGRICULTURAL ACTIVITIES WE RE CARRIED ON BY THE ASSESSEE. THE LAND HAD BEEN ASSESSED FOR HIGHER LAND RE VENUE AS APPLICABLE FOR NON-AGRICULTURAL LAND FOR ASSESSMENT YEAR 2002-03. IN ITA NO.4177/M/11 A.Y. 07-08 9 THE LAND RECORDS, THE LAND WAS ALSO CLASSIFIED AS LAND WHE RE NO AGRICULTURAL OPERATIONS ARE CARRIED OUT. THE MEMORANDU M OF ASSOCIATION OF THE ASSESSEE COMPANY ALSO DID NOT AUTHORIZE T HE ASSESSEE TO CARRY OUT ANY AGRICULTURAL OPERATIONS. THERE W ERE NO AGRICULTURAL OPERATIONS SHOWN IN THE ANNUAL ACCOUNT FOR THE PERIOD 1998-99 FOR 2006-07. THUS LAND COULD NOT BE CONSIDERED AS AGRICULTURAL LAND. THE ASSESSEE REFERRED TO JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF COMMISSIONER OF WEALTH-TA X VS OFFICER- IN-CHARGE (COURT OF WARDS) (105 ITR 133), IN WHICH IT WAS HELD THAT AGRICULTURAL LAND MUST BE A LAND WHICH COULD BE SAID TO BE EITHER ACTUALLY USED OR ORDINARILY USED OR MEANT TO BE USED F OR AGRICULTURAL PURPOSES. THE LAND MUST HAVE A CONNECTION WITH THE AGR ICULTURAL PURPOSE FUND USER. THEREFORE, THE LAND HAD TO BE CONSID ERED AS CAPITAL ASSET ON DATE OF CONVERSION I.E., 31.3.2000 AND PROVISIO NS OF SECTION 45(2) SHOULD BE APPLIED. THE ASSESSEE ALSO OBJECTED TO THE APPLICATION OF SECTION 50C AS THE SAME WAS APPLICABLE FROM ASSESSMENT Y EAR 2003-04 AND COULD NOT BE APPLIED TO THE CAPITAL GAIN ON THE DATE OF CONVERSION ON 31.3.2000. IT WAS ALSO POINTED OUT THAT T HE PROVISIONS OF SECTION 50C WERE NOT APPLICABLE IN CASE OF COMPUTATION O F BUSINESS PROFIT. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CIT (A) SHOULD BE SET ASIDE. ITA NO.4177/M/11 A.Y. 07-08 10 3.2 CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE AREA IN WHICH LAND WAS SITUATED HAD ALREADY BEEN DECLARED BY THE STATE GOVERNMENT AS INDUSTRIAL ZONE AN D THE TRANSFER OF THE LAND ITSELF WAS MADE UNDER BOMBAY TENANCY & AGR ICULTURAL LANDS ACT, 1958 UNDER SECTION 63 AS PER WHICH AGRICULTUR AL LAND COULD BE TRANSFERRED FOR NON AGRICULTURAL PURPOSE. THEREFORE , RIGHT FROM THE DATE OF ACQUISITION OF THE LAND BY THE ASSESSEE, IT WAS CONSIDERED AS NON-AGRICULTURAL LAND BY THE REVENUE AUTHORITIES, O THERWISE IT COULD NOT HAVE BEEN TRANSFERRED FOR INDUSTRIAL USE. THE LAND HA D BEEN PURCHASED FOR INDUSTRIAL USE. MERELY BECAUSE THE LAND WAS SHOWN A S AGRICULTURAL LAND IN REVENUE RECORDS, THE SAME COULD NOT BE CONSIDERED AS AGRICULTURAL LAND IN ABSENCE OF ANY USER OF THE LAND FO R AGRICULTURAL PURPOSES. FOR LAND TO BE CLASSIFIED AS AGRICULTURAL, IT SHO ULD BE MEANT FOR AGRICULTURAL USE AND SHOULD BE ACTUALLY USED OR ORDI NARILY USED FOR AGRICULTURAL PURPOSES. THE LAND IN THIS CASE COULD NOT BE USED FOR AGRICULTURAL PURPOSE BEING IN INDUSTRIAL ZONE. THE MO A OF THE ASSESSEE ALSO DID NOT PERMIT AGRICULTURAL ACTIVITIES. MOREOVER, THE ISSUE OF CONVERSION OF LAND INTO STOCK-IN-TRADE HAD ALREADY BEEN DECIDED AND BECAME FINAL IN ASSESSMENT YEAR 2000-01. 3.2 THEREFORE CIT(A) AGREED WITH THE ASSESSEE THAT TH E PROVISIONS OF SECTION 45(2) WERE REQUIRED TO BE INVOKED FOR COMPU TATION OF INCOME CHARGEABLE TO TAX AS PER WHICH THE GAIN BASED ON MARKET VALUE ITA NO.4177/M/11 A.Y. 07-08 11 ON THE DATE OF CONVERSION HAS TO BE ASSESSED AS CAPITAL GAIN AND BALANCE GAIN AS BUSINESS PROFIT. CIT(A) ALSO ACCEPTED THE P LEA OF THE ASSESSEE REGARDING APPLICABILITY OF PROVISIONS OF SECTION 50 C. THESE PROVISIONS WERE APPLICABLE FROM ASSESSMENT YEAR 2003-04. THEY COULD NOT BE APPLIED TO THE COMPUTATION OF CAPITAL GAIN IN THE YEAR OF CONVERSION I.E., ASSESSMENT YEAR 2000-01. THESE PROVISION S COULD ALSO BE NOT APPLIED IN RELATION TO COMPUTATION OF BUSINESS PROFIT AS THESE WERE APPLIED ONLY FOR COMPUTATION OF CAPITAL GAIN. CI T(A) ALSO HELD THAT THE ASSESSEE HAD CAPITALIZED THE INTEREST COST IN RELATION TO PURCHASES OF LAND PRIOR TO THE DATE OF CONVERSION AMOUNTING TO RS.99,41,000/- WHICH HAS TO BE ADDED TO THE COST OF ACQUISITION OF RS.1, 73,56,879/- AND INDEXED COST HAS TO BE COMPUTED ACCORDINGLY FOR THE P URPOSE OF COMPUTATION OF LONG TERM CAPITAL GAIN UNDER SECTION 25( 2) BUT DIFFERENCE BETWEEN SALE VALUE OF THE LAND AND THE MAR KET VALUE OF RS.3,54,00,000/- ON THE DATE OF CONVERSION HAS TO BE ASSE SSED AS BUSINESS PROFIT. AGGRIEVED BY THE DECISION OF CIT(A), TH E REVENUE HAS DISPUTED THE DECISION OF CIT(A) TO DELETE THE SHORT TER M CAPITAL GAIN COMPUTED BY AO AND FOR APPLYING PROVISIONS OF SECTION 45 (2). 4. BEFORE US, THE LD. DR APPEARING ON BEHALF OF THE REVENUE ASSAILED THE ORDER OF CIT(A). IT WAS SUBMITTED THAT LAND WAS SIT UATED WITHIN MUNICIPAL LIMITS AND WAS BEING ORDINARILY USED FOR TH E PURPOSE OF AGRICULTURE. SUCH LAND HAD TO BE TREATED AS AGRICULTUR AL LAND TILL IT WAS ITA NO.4177/M/11 A.Y. 07-08 12 CONVERTED INTO NON-AGRICULTURAL LAND BY THE REVENUE. IT WAS ARGUED THAT IN CASE THE LAND TREATED AS AGRICULTURAL ON THE B ASIS OF USE, IT WOULD LEAD TO ABSURDITY AS IN THAT CASE EVEN URBAN LAND WOULD BECOME AGRICULTURAL. IT WAS SUBMITTED THAT THE JUDGMENT OF HON 'BLE SUPREME COURT IN THE CASE OF COMMISSIONER OF WEALTH-TAX VS OFFIC ER-IN-CHARGE (COURT OF WARDS) (105 ITR 133), (SUPRA), WAS IN RELATI ON TO WEALTH TAX ACT, AND THEREFORE, COULD NOT BE APPLIED TO PROVISIONS OF INCOME TAX ACT. HE REFERRED TO THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. STATE BANK OF INDIA (213 ITR 1) I N WHICH IT WAS HELD THAT THE PROVISIONS OF A STATUTE COULD NOT BE INT ERPRETED WITH RESPECT TO PROVISIONS OF OTHER STATUTE. IN THAT CASE, IT WAS POINTED OUT THAT EXEMPTION HAD BEEN DENIED UNDER INCOME TAX ACT. THE COURT ALLOWED EXEMPTION UNDER THE WEALTH TAX ACT BASED ON T HE PROVISIONS OF THE SAID ACT. AS REGARDS CONVERSION IN ASSESSMENT YEAR 200 0-01, IT WAS SUBMITTED THAT THE ISSUE HAD NOT BEEN EXAMINED BY T HE AO IN THAT ASSESSMENT YEAR AS IT HAD NO IMPACT ON COMPUTATION OF INCO ME. THEREFORE, THERE WAS NO LACK OF JURISDICTION ON PART O F THE AO IN ASSESSMENT YEAR 2007-08 IN WHICH INCOME WAS BEING COMPUTED FROM SALE OF LAND TO LOOK INTO ISSUE OF CONVERSION AS THE AO H AD TO EXAMINE ALL ASPECTS RELATING TO COMPUTATION OF CAPITAL GAIN. I T WAS ALSO SUBMITTED THAT THE TERM AGRICULTURAL LAND MUST BE IN TERPRETED WITH RESPECT TO LITERAL MEANING AS THE SAME WAS CLEAR AND UNA MBIGUOUS. ITA NO.4177/M/11 A.Y. 07-08 13 HE REFERRED TO THE JUDGMENT OF THE HON'BLE SUPREME CO URT IN THE CASE OF ORISSA STATE WAREHOUSING CORPORATION VS CIT (237 ITR 589) IN THIS REGARD AND SEVERAL OTHER JUDGMENTS. IT WAS THUS ARGUED THAT LAND IN THIS CASE BECAME CAPITAL ASSET ONLY ON 27.5.2004 WHEN IT W AS CONVERTED INTO NON-AGRICULTURAL AND IT WAS ACCORDINGLY URGED THAT APPROACH ADOPTED BY THE AO IN RESPECT OF SHORT TERM CAPI TAL GAIN SHOULD BE ACCEPTED. 4.1 THE LD. AR FOR THE ASSESSEE ON THE OTHER HAND REITE RATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES THAT THE A REA IN WHICH THE LAND WAS SITUATED HAD BEEN DECLARED BY THE GOVERN MENT AS INDUSTRIAL ZONE AND, THEREFORE, WHEN THE LAND WAS ACQ UIRED BY THE ASSESSEE IT WAS IN INDUSTRIAL ZONE. THE LAND WAS NOT MEANT FOR AGRICULTURAL USE NOR ANY AGRICULTURAL ACTIVITY WAS CARRIE D ON BY THE ASSESSEE AND, THEREFORE, IT HAS TO BE CONSIDERED AS NON-AGR ICULTURAL IN VIEW OF THE TESTS LAID BY HON'BLE SUPREME COURT IN CASE OF CWT VS OFFICER-IN-CHARGE (COURT OF WARDS) (105 ITR 133), (SUP RA). IT HAD BEEN MADE CLEAR BY THE HON'BLE SUPREME COURT THAT ENTRY IN THE LAND RECORDS IS NOT CONCLUSIVE. WHAT WAS RELEVANT WAS THE INTENT ION OF THE OWNERS TO CONNECT THE LAND WITH AGRICULTURAL PURPOSES AN D THEREFORE UNLESS ANY CONNECTION WAS SHOWN FOR AGRICULTURAL PURPOSE, T HE SAME COULD NOT BE CONSIDERED AS AGRICULTURAL LAND. THE LD. A R FILED A COPY OF ORDER DATED 29.8.1992 OF THE GOVERNMENT AS PER WHICH LAND WAS ITA NO.4177/M/11 A.Y. 07-08 14 ALLOTTED TO THE ASSESSEE IN WHICH IT WAS CLEARLY MENTIONE D THAT THE ASSESSEE WAS PURCHASING THE PROPERTY FOR INDUSTRIAL PURPOSE AND THAT IT HAD TO BE USED ONLY FOR INDUSTRIAL PURPOSE AFTER TAKIN G NECESSARY PERMISSIONS. THE ORDER ALSO MENTIONED THAT SALE OF PROPE RTY WAS PERMISSIBLE FOR INDUSTRIAL PURPOSES UNDER RAIGAD DEVELOP MENT SCHEME. HE ALSO REFERRED TO THE JUDGMENT OF HON'BLE HIG H COURT OF BOMBAY IN THE CASE OF CIT VS. S.N. DESAI (177 ITR 151 ), IN WHICH IT WAS HELD THAT ENTRY IN REVENUE RECORDS WAS NOT CONCLUSIVE AND CUMULATIVE EFFECT OF ALL ATTENDING CIRCUMSTANCES SHOULD BE CONSIDERED FOR COMING TO THE CONCLUSION WHETHER LAND WAS AGRICULTUR AL OR NOT. 4.2 AS REGARDS CONVERSION OF LAND AS ON 31.3.2000, IT W AS SUBMITTED THAT THE ASSESSEE WAS DECLARED SICK BY BIFR IN 1999 AND, TH EREFORE IT CONVERTED THE LAND INTO STOCK-IN-TRADE WHICH WAS SUPPORTE D BY THE BOARD RESOLUTION AND NECESSARY DETAILS HAD BEEN GIVEN I N THE RETURN FOR ASSESSMENT YEAR 2000-01 WHICH WAS ACCEPTED AFTER SCRUTINY AND THEREFORE THE SAME COULD NOT BE RE-EXAMINED IN LATER YEAR. THE ISSUE HAD TO BE EXAMINED IN THE YEAR OF CONVERSION. RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF TATA HSG. DEV ELOPMENT (45 SOT 9). THE LD. AR POINTED OUT THAT IN CASE THE LAND WAS CONSIDERED AS AGRICULTURAL THEN NO CAPITAL GAIN COULD BE CHARGED UNDE R SECTION 45(2) OF THE ACT AND ONLY THE DIFFERENCE BETWEEN MARKET VAL UE AS ON 31.3.2000 AND SALE VALUE COULD BE ASSESSED AS BUSINESS PROFI T IN VIEW ITA NO.4177/M/11 A.Y. 07-08 15 OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BAI SHIRINBAI K. KOOKA (46 ITR 86). IT WAS ALSO POINT ED OUT THAT FACTUM OF CONVERSION WAS NOT IN DISPUTE AND ONLY APPLICABILITY OF PROVISIONS OF SECTION 45(2) WAS DISPUTED. IT WAS ARGUED THAT THE LAND BEING NON AGRICULTURAL WHICH HAD BEEN CONVERTED INTO TRADING STO CK ON 31.3.2000, PROVISIONS OF SECTION 45(2) HAVE TO BE APPLIED AND PROF IT HAD TO BE COMPUTED UNDER THE SAID PROVISIONS IN THE YEAR OF SALE. IN RELATION TO APPLICATION OF PROVISIONS OF SECTION 50C, IT WAS SUBMITTE D THAT THE SAME WERE NOT APPLICABLE TO COMPUTATION OF BUSINESS PROFI T AND SINCE THE PROVISIONS WERE EFFECTIVE FROM ASSESSMENT YEAR 2003-0 4, THE SAME DID NOT APPLY TO COMPUTATION OF CAPITAL GAIN FOR ASSESSME NT YEAR 2000- 01. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CIT(A) SHOULD BE UPHELD. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS APP EAL IS REGARDING COMPUTATION OF CAPITAL GAIN FROM SALE OF LAND. THE ASSESSE E HAD ACQUIRED CERTAIN PLOTS OF LAND DURING ASSESSMENT YEAR 1991 -92 TO 2003-04 UNDER BOMBAY TENANCY AND AGRICULTURAL ACT. 195 8. THE AREA IN WHICH LAND WAS SITUATED HAD BEEN NOTIFIED BY THE GO VERNMENT AS INDUSTRIAL ZONE. THE ASSESSEE HAD BEEN ALLOTTED LAND TO BE USED FOR THE BONAFIDE NON AGRICULTURAL PURPOSES AFTER TAKING NA (N ON AGRICULTURAL) PERMISSION FROM THE COMPETENT AUTHORITY. THESE FACTS ARE NOT ITA NO.4177/M/11 A.Y. 07-08 16 DISPUTED. THE ASSESSEE CONVERTED THE LAND INTO STOCK-IN-TR ADE ON 31.3.2000 BY PASSING A BOARD RESOLUTION AS THE ASSESSEE BEI NG A SICK COMPANY COULD NOT USE IT FOR INDUSTRIAL PURPOSES. THE ASSE SSEE HAD BEEN TAKING EXTENSION FROM TIME TO TIME FOR INDUSTRIA L USE AND GOT THE LAND CONVERTED INTO NON-AGRICULTURAL LAND ON 27.5.200 4. THE ASSESSEE SOLD THE LAND ON 25.5.2006. SINCE THE ASSESSEE TREATED TH E LAND AS NON-AGRICULTURAL I.E. A CAPITAL ASSET ON THE DATE OF CO NVERSION INTO STOCK-IN-TRADE ON 31.3.2000, THE ASSESSEE APPLIED THE PRO VISIONS OF SECTION 45(2) FOR COMPUTATION OF INCOME FROM TRANSFER O F SUCH LAND. UNDER THE SAID PROVISIONS, IN CASE, THE ASSESSEE CONVERTS CAPI TAL ASSET INTO STOCK-IN-TRADE OF THE BUSINESS CARRIED BY HIM, THE I NCOME FROM SUCH CONVERSION WILL BE CHARGEABLE TO TAX AS CAPITAL GAIN IN THE YEAR IN WHICH SUCH ASSET IS SOLD AND FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION WILL BE DEEMED TO BE FULL VALUE OF CONSI DERATION RECEIVED OR ACCRUED AS A RESULT OF TRANSFER BY WAY OF CONVERSION AN D CAPITAL GAIN WOULD BE COMPUTED ACCORDINGLY. THE FAIR MARKET VALUE ( FMV) OF THE ASSET ON THE DATE OF CONVERSION AS PER VALUATION REPORT WAS 3.54 CRORES. THE ASSESSEE COMPUTED THE CAPITAL GAIN AFTER REDUCIN G INDEXED COST OF ACQUISITION FROM THE FMV ON THE DATE OF CONVERSI ON. THE DIFFERENCE BETWEEN THE SALE PRICE AND FMV ON THE DATE OF CONVERSION HAD BEEN OFFERED BY THE ASSESSEE AS BUSINESS INCOME ABOUT WH ICH THERE IS NO DISPUTE. ITA NO.4177/M/11 A.Y. 07-08 17 5.1 THE AO HOWEVER DID NOT ACCEPT THE METHOD EMPLOYED BY THE ASSESSEE FOR COMPUTATION OF CAPITAL GAIN AND BUSINESS PROFIT . THE MAIN OBJECTION OF THE AO WAS THAT THE LAND WAS MEANT FOR IN DUSTRIAL USE AND, THEREFORE, COULD NOT BE CONVERTED INTO STOCK-IN-TR ADE. HE, HAS THEREFORE, TREATED THE CONVERSION AS ILLEGAL. THE AO H AS ALSO HELD THAT THE LAND REMAINED AGRICULTURAL AS IT HAD NOT BEEN CONV ERTED INTO NON- AGRICULTURAL LAND AND, THEREFORE, ON THE DATE OF CONV ERSION THERE WAS NO CAPITAL ASSET WHICH COULD BE CONVERTED INTO CERTAIN TRA DE OF THE BUSINESS DONE BY THE ASSESSEE. THE AO HAS NOT ACCEPTED THE CLA IM OF THE ASSESSEE THAT FACTUM OF CONVERSION HAD BEEN ACCEPTED IN ASSESSMENT YEAR 2000-01 IN THE ORDER PASSED UNDER SECTION 143(3)/147. THE AO HAS OBSERVED THAT IN THAT YEAR, TH E ISSUE WAS NEITHER RELEVANT TO THE COMPUTATION OF INCOME NOR HAD BEEN SPECIFICALLY EXAMINED BY THE AO. THE AO HAS THUS REJECTED THE CLAIM OF CONVERSION AS ON 31.3.2000 AS NULL AND VOID. AS PER THE AO, CAPITAL ASSET CAME INTO EXISTENCE ON 27.5.2004 WHEN THE LAND WAS CONVERTED INTO NON-AGRICULTURAL LAND AND SINCE THE SAME WAS SOLD WI THIN A PERIOD OF THREE YEARS ON 25.5.2006. THE AO HAS COMPUTED SHORT TERM CAPITAL GAIN FROM SALE OF LAND. 5.2 THUS THE MAIN DISPUTE IS WHETHER ON 31.3.2000 WHEN THE LAND HAD NOT BEEN CONVERTED INTO NON-AGRICULTURAL LAND, IT CAN BE CONSIDERED ITA NO.4177/M/11 A.Y. 07-08 18 AS A NON-AGRICULTURAL LAND AND WHETHER THE CONVERSION BY THE ASSESSEE INTO STOCK-IN-TRADE WAS LEGALLY VALID. WE FIND THAT EV EN THOUGH THE LAND HAD NOT BEEN CONVERTED INTO NON-AGRICULTURAL LAND ON 31.3.2000, THERE IS NO DISPUTE THAT THE LAND WAS SITUATED IN THE INDUSTR IAL ZONE AND WAS MEANT FOR INDUSTRIAL USE. THE CLAIM OF THE ASSESSEE THAT T HE LAND WAS NOT MEANT FOR AGRICULTURAL USE NOR ANY AGRICULTURAL A CTIVITY HAD BEEN CARRIED ON BY THE ASSESSEE ON THE SAID LAND AFTER THE DAT E OF ACQUISITION HAS NOT BEEN CONTROVERTED BEFORE US. THE AG RICULTURAL LAND HAS NOT BEEN DEFINED IN THE ACT. THE ISSUE AS TO WHAT WOULD CONSTITUTE AGRICULTURAL LAND HAD COME UP FOR CONSIDERATION BY THE HON'BLE SUPREME COURT IN THE CASE OF CWT VS OFFICER-IN-CHARGE (C OURT OF WARDS) (105 ITR 133), (SUPRA). THE HON'BLE SUPREME COU RT HELD THAT FOR A LAND TO BE AGRICULTURAL, IT WAS REQUIRED TO BE SHOWN ITS CONNECTION WITH AGRICULTURAL PURPOSE AND USER AND NOT MERELY POSSI BILITY OF USAGE BY SOME FUTURE OWNER. THE SUPREME COURT ALSO HELD THA T THE ENTRY IN THE REVENUE RECORDS THOUGH PRIMA FACIE CONSTITUTED GOOD EVIDENCE BUT WAS NOT CONCLUSIVE IN DETERMINING THE TRUE NATURE OF L AND. IN THE PRESENT CASE, NO CONNECTION OF THE LAND TO THE AGRICULTUR AL PURPOSES OR USER IS ESTABLISHED. IN FACT, LAND WAS NOT MEANT FOR AGRI CULTURAL PURPOSES AND HAD ALSO NOT BEEN USED BY THE ASSESSEE FOR AGR ICULTURAL PURPOSES. THUS, EVEN THOUGH THE LAND HAD NOT BEEN CONVE RTED INTO NON-AGRICULTURAL IT REMAINED NON-AGRICULTURAL LAND. THE CONVERSION INTO ITA NO.4177/M/11 A.Y. 07-08 19 NON-AGRICULTURAL LAND WAS NECESSARY FOR THE PURPOSE OF U SAGE OF THE LAND FOR INDUSTRIAL PURPOSE AND MERELY BECAUSE THE LAN D WAS NOT CONVERTED THE SAME COULD NOT BE CONSIDERED AS AGRICULTURAL AS THERE WAS NO CONNECTION OF THE LAND TO THE AGRICULTURAL PURPO SE AND USER. 5.3 THE ARGUMENT OF THE LD. DR THAT SINCE LAND WAS BE YOND MUNICIPAL LIMITS THE SAME HAS TO BE CONSIDERED AS AGRICULTURAL CAN NOT BE ACCEPTED AS IT IS NOT THE LOCATION OF THE LAND BUT ITS CONNECTION WITH AGRICULTURAL PURPOSE AND USER WHICH MAKES IT AGRICULTURA L. THE LD. DR HAS ALSO ARGUED THAT THE JUDGMENT OF HON'BLE SUPREME C OURT IN CASE OF CWT VS OFFICER-IN-CHARGE (COURT OF WARDS) (105 ITR 1 33), (SUPRA), WHICH WAS RENDERED IN CONNECTION WITH THE WEALTH TAX A CT CAN NOT BE APPLIED IN CASE OF INCOME TAX ACT. THE TERM AGRICULTURA L LAND HAS NOT BEEN DEFINED EITHER IN THE INCOME TAX ACT OR IN WEALT H TAX ACT AND UNDER BOTH ACTS IT IS ENTITLED FOR EXEMPTION FROM TAXA TION. THEREFORE, TESTS LAID DOWN BY THE HON'BLE SUPREME COURT TO DETERM INE THE TRUE NATURE OF LAND IN A CASE RELATING TO WEALTH TAX ACT WI LL BE EQUALLY APPLICABLE IN CASE OF INCOME TAX ACT. RELIANCE BY THE LD. DR ON THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF CI T VS. STATE BANK OF INDIA (SUPRA), IN WHICH IT WAS HELD THAT PROV ISIONS OF A STATUTE COULD NOT BE INTERPRETED WITH RESPECT TO THE PROVISION S OF ANOTHER STATUTE, IS NOT APPLICABLE TO THE FACTS OF THE PRESENT C ASE AS IN THIS CASE WE ARE NOT CONCERNED WITH THE INTERPRETATION OF THE P ROVISIONS OF THE ITA NO.4177/M/11 A.Y. 07-08 20 STATUTE. WE ARE CONCERNED WITH THE DEFINITION OF AGRI CULTURAL LAND WHICH HAS NOT BEEN DEFINED IN EITHER OF THE ACTS. 5.4 IN VIEW OF THE FOREGOING DISCUSSION WE HOLD THAT T HE LAND WAS NON-AGRICULTURAL ON THE DATE OF CONVERSION ON 31.3.20 00 AND, THEREFORE, A CAPITAL ASSET. THE CONVERSION INTO STOCK-IN-T RADE WAS SUPPORTED BY BOARD RESOLUTION FOR WHICH NO DISPUTE HAS B EEN RAISED. THE ASSESSEE WAS ALSO INVOLVED IN REAL ESTATE ACTIVITIES AN D THEREFORE CONVERSION OF THE NON-AGRICULTURAL LAND HAS TO BE CONSIDE RED AS STOCK- IN-TRADE OF THE BUSINESS OF THE ASSESSEE . THE CONVERSION OF LAND INTO STOCK-IN-TRADE HAD BEEN DULY DECLARED BY THE ASSESSEE IN T HE RETURN FOR THE ASSESSMENT YEAR 2000-01. THE NOTES TO THE AUDITED ACCO UNTS ALSO MENTIONED THIS FACT AND DIFFERENCES BETWEEN COST OF LAND AND MARKET VALUE HAD BEEN CREDITED INTO CAPITAL RESERVE. WE THERE FORE, SEE NOTHING ILLEGAL ABOUT THE CONVERSION OF LAND BY THE A SSESSEE INTO STOCK- IN-TRADE. A COPY OF THE ORDER DATED 29.2.1992 OF THE COMPETENT AUTHORITY AS PER WHICH THE LAND WAS ACQUIRED BY THE A SSESSEE ALSO DID NOT PROHIBIT THE SALE OF LAND. IT CLEARLY STATED THAT SALE OF LAND WAS PERMITTED FOR INDUSTRIAL PURPOSES. SINCE THE LAND WAS NON-AGRICULTURAL AND COULD BE SOLD WITH THE PERMISSION OF THE COMPETENT A UTHORITY, WE DO NOT SEE ANY THING ILLEGAL IN CONVERSION OF THE LAND INTO STOCK-IN- TRADE BY THE ASSESSEE. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) IN APPLYING THE PROVISIONS OF SECTION 45(2) OF T HE ACT. WE ALSO ITA NO.4177/M/11 A.Y. 07-08 21 DO NOT SEE ANY INFIRMITY IN THE ORDER OF CIT(A) HOLD ING THAT PROVISIONS OF SECTION 50C WILL NOT APPLY TO COMPUTATION OF CAPITAL GAIN ON CONVERSION OF LAND IN ASSESSMENT YEAR 2000-01 AS THE SAID P ROVISIONS WERE EFFECTIVE ONLY FOR ASSESSMENT YEAR 2003-04. THE O RDER OF CIT(A) IS, THEREFORE, UPHELD. 6. IN THE RESULT, APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.12.2012 SD/- (VIVEK VARMA ) JUDICIAL MEMBER SD/- (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 14.12.2012 JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.