KAY FOAM LTD. , MUMBAI V. PR. CIT -2, MUMBAI

ITA 598/MUM/2021

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 1732 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: H
• Assessment Year: 2010-2011
• Appeal Filed On: 19-04-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset converted into stock in trade; Capital asset; Revision of order; Opportunity of being heard; Principle of natural justice; Period of limitation; Date of conversion; Fair market value; Time period of passing order; Reassessment proceedings; Capital Gains
• Section: 147; 263; 2; 45(2); 143(3); 143(1); 48; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "H" BENCH, MUMBAI SHRI PRAMOD KUMAR, VICE PRESIDENT SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 598/MUM/2021 (ASSESSMENT YEAR: 2010-11) Kay Foam Limited, 103, Sir Vithaldas Chamber, 16, Mumbai Samachar Marg, Mumbai - 400001 [PAN: AAACK2093G] Principal Commissioner of Income Tax – 2, Mumbai, Room No. 344, 3rd Floor, Aayakar Bhavan, M.K. Road, Churchgate, Mumbai - 400020 .................. Vs ................... Appellant Respondent Appearances For the Appellant/ Assessee For the Respondent/Department : : Shri Vipul Joshi Ms. Priyanshi Desai Smt. Neelam Shukla Date of conclusion of hearing Date of pronouncement of order : : 23.02.2022 20.05.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant/Assessee has challenged the order, dated 31.03.2021, passed by the Ld. Principal Commissioner of Income Tax–2, Mumbai [hereinafter referred to as „the PCIT‟] under Section 263 of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟] for the Assessment Year 2010-11, whereby the PCIT set aside the Assessment Order dated 31.12.2017 passed under Section 143(3) read with section 147 of the Act. 2. Appellant has raised the following grounds of appeal: ITA. No. 598/Mum/2021 Assessment Year: 2010-11 2 1. Breach of the principle of natural justice 1.1 The Learned Principle Commissioner of Income-tax -2, Mumbai [“Ld. PCIT”], erred in framing the revision order u/s. 263 of the Income tax Act, 1961 [“the Act”] by not giving proper, sufficient and effective opportunity of being heard to the Appellant. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, the revision order is required to be held as bad and illegal as the same is passed in breach of the principles of natural justice, as well as with non application of mind to the facts and the contentions brought on record by the Appellant. Without prejudice to the above 2. Revision Illegal 2.1 The Ld. PCIT erred in passing the order u/s. 263 of the Act, revising the assessment order passed by the A.O. u/s. 143 (3) r.w.s. 147 of the Act. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, the order is bad, illegal and void as necessary pre conditions for initiating the revision proceeding as well as the completion thereof were not fulfilled. 2.3 Without prejudice to the generality of the above, the PCIT failed to appreciate that: (i) The order is time barred; ((ii) (ii) The reassessment order had already merged with the appellate order; (iii) The assessment order framed was not “erroneous” within the meaning of section 263 of the Act; and (iv) In any case, the assessment order was not “prejudicial to the interest of the revenue” within the meaning of section 263 of the Act. ITA. No. 598/Mum/2021 Assessment Year: 2010-11 3 2.4 It is submitted that in the facts and the circumstances of the case, and in law, no revision u/s 263 of the Act was called for. Without further prejudice to the above 3. On merits 3.1 Otherwise also, it is submitted that in the facts and the circumstances of the case, and in law, on merits also, no revision u/s 263 of the Act was called for. 3.2 Without prejudice to the generality of the above, it is submitted that in the facts and the circumstances of the case, and in law, no capital gain tax liability arose in the hands of the Appellant for A.Y. 2010-2011.” 3. The brief facts of the case are as under. 3.1. On account of fire in the factory and the financial problems that followed, the Appellant suspended manufacturing activities and entered into a Development Agreement with M/s Beejay Realtors Private Limited, (hereinafter referred to as „the Developer‟) registered on 12.03.2008 for transfer of development rights in respect of the property situated at Village Akurli, Taluka Borivali, Survey No. 19, Hissa No. 6, CTS No. 181. Since an Irrevocable Power of Attorney was executed by the Appellant in favour of the Developer on 21.02.2008, the Developer was already in possession of the Property at the time of execution of the Development Agreement. (Refer to Para II- 3 of the Short Note provided by the Appellant and Clause 13 of the Development Agreement) 3.2. As per the Development Agreement, the Appellant was entitled to receive INR 6 Crores plus 15% of the area to be constructed by the Developer. Out of the aforesaid amount of INR 6 Crores, INR 1.48 Crores was paid prior to the execution of the Development ITA. No. 598/Mum/2021 Assessment Year: 2010-11 4 Agreement, INR 2.25 Cores was to be paid on or before the execution of the Development Agreement, INR 1.13 Crores was to be paid on or before 15.05.2008, and the balance amount of INR 1.14 Crores was to be paid on or before 15.07.2008. As per Clause 9 the Developer was entitled to investigate the title of Appellant by inviting claims in respect of the Property by means of issuing public notice in the newspapers. Further, as per Clause 13, the Developer was entitled to demolish to existing factory and structures. As per Clause 22, 23 and 24, the Developer had the right to carry out construction on the land forming party of the Property. 3.3. In modification of the Development Agreement a Supplemental Agreement (hereinafter referred to as „the SA‟) was executed between the Appellant and Developer on 11.07.2009 which was also registered. As per the recitals in the SA, the Appellant and the Developer had agreed to execute the same for the purpose of extending the time for making payment of INR 1.14 Crores by the Developer to the Appellant. As per para 2 of the SA payment of INR 1.14 Crores was reschedule as follows – (i) INR 25,00,000/- on 15.07.2009, (ii) INR 10,00,000/- each on 15.09.2009, 15.11.2009, 15.01.2010 and 15.03.2010, (iii) INR 9,00,000/- on 15.05.2010, and (iv) INR 40,00,000/- within 15 days from the Occupation Certificate. Para 4 of the SA clearly provided that all the other terms and conditions of the Development Agreement shall continue to subsist and bind the Appellant/Developer. 3.4. The Appellant filed the original return of income for the Assessment Year 2010-11 on 28.09.2011 declaring loss of INR 32,638/- which was processed Under Section 143(1) of the Act. 3.5. During the assessment proceedings for the Assessment Year 2013-14, the Appellant submitted a copy of the Development Agreement and the SA in response to a query raised in relation to an outstanding unsecured loan of INR 5.7 Crores from the Developer reflected in the ITA. No. 598/Mum/2021 Assessment Year: 2010-11 5 books of accounts. Taking note of the same, the assessment for the Assessment Year 2010-11 was reopened as the Assessing Officer was of the view that despite all the conditions of transfer under Section 2(47)(v) of the Act read with Section 53A of the Transfer of Property Act, 1882 being satisfies during the relevant previous year, the Appellant had not offered to tax capital gains income during the Assessment Year 2010-11. The relevant extract of reasons recorded for reopening read as under: “During the assessment proceedings for the assessment year 2013-14 selected under CASS for verification of large increase in unsecured loan, following facts emerged, which are as under: This case has been selected for scrutiny through CASS for verification of large increase of unsecured loans. During the assessment proceedings, the assessee has submitted annual accounts. From which it is seen that the assessee has shown unsecured loans of Rs 6,01,14,896/-. Out of the same, the Assessee has shown unsecured loans of Rs. 5,70,00,000/- from M/s Beejay Realtors Private Limited. The assessee was asked to submit the nature of transaction and also requested to submit the confirmation from the loan creditor party. The assessee submitted confirmation from M/s Beejay Realtors Private Limited and also submitted Development Agreement dated 12.03.2008 and Supplementary Agreement dated 11.07.2009 on the basis of which the Assessee had received the amount of Rs. 5.70 Crores. It is noticed from the development agreements that the assessee was to receive consideration of Rs. 6 Crores and in addition to the above the developer will construct and provide premises in 15% of the area that is sanctioned for construction including the FSI sanctioned by MCGM and accrued by way of TDR and sanctioned by MCGM on the said property and 15% of the car space. It is also pertinent to mention that the value of land transferred as per stamp authority is Rs.19,90,71,000/-. It is further noticed that the terms of principal agreement dated 12.03.2008 was not followed (defaulted the payment] by the M/s Beejay Realtors Pvt. Ltd. and hence supplementary agreement was executed vide agreement dated 11.07.2009, wherein both the parties confirm the agreement and also decide the mode/schedule of Payments. After this ITA. No. 598/Mum/2021 Assessment Year: 2010-11 6 supplementary agreement, it is noticed that M/s Beejay Realtors Pvt. Liq. paid the above amount strictly as per the agreement to the assessee and Performed it‟s duty and also shown interest in developing the property as “commencement certificate was granted by Brihanmumbai Mahanagar palika vide order dated 12.08 20009. Further, the agreement used the word consideration for “the amount of Rs. 6.00 crores and 15% of the Flat to be constructed and to be received by the assessee.” It is also evidenced from the facts that M/s Beejay Realtors Pvt. Ltd. has shown the amount paid of Rs. 6 Crores i.e. the said project as Work-in-progress in it‟s Balance Sheet and not as loans and advances given. Hence, assessee‟s contention that it is a loan is not correct. As all the conditions of transfer under section 2(47)(v) of the Income Tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882 satisfies in this case for A.Y. 2010-11, Capital Gain for the transfer of Land for Development of property is to be taxed, which the assessee has not offered. The amount of capital gain on the transfer of Land as per Development Agreement is to be computed after ascertaining the value of 15% of the project to be constructed by M/s Beejay Realtors Pvt. Ltd., which the assessee failed to submit during the assessment proceedings of A.Y. 2013-14. Hence, the capital gain is computed on the basis of details available. The value of land as per Stamp duty authority [Rs.19,90,71,000/- is taken as consideration of sale of land and thus, the Capital gain is computed as under: Sale Value : Rs.19,90,71,000/- Purchase Value : Rs. 1,26,378/- ( in the year 1969-70) Hence, Capital gains will be charged as under: Sale value : Rs. 19,90,71,000/- Purchase Value after indexation (Rs.1,26,378/- * 711/100) : Rs. 8,98,547/- Long Term Capital gains : Rs. 19,81,72,453/-“ (Emphasis Supplied) ITA. No. 598/Mum/2021 Assessment Year: 2010-11 7 3.6. Assessment under Section 143(3) read with Section 147 of the Act was framed on the Appellant vide order, dated 31.12.2017. The Assessing Officer accepted the return declaring loss of INR 32,638/-filed by the Appellant. According to the Assessing Officer the Appellant had converted capital asset, being land and building under consideration, into stock-in-trade during the financial year 2007-08 and therefore, the capital gains were chargeable to tax during the previous year in which such stock-in-trade was sold or transferred as per provisions of Section 45(2) of the Act. The Assessing Officer observed that the Development Agreement was not yet completed as the Appellant had only transferred development rights and not the land. The relevant extract of the aforesaid order reads as under: “ 2.3 From the above facts of the case it is gathered that the assessee has converted its capital assets being land and building into stock in trade in the FY 2007-08 which is under sale by virtue of development agreement. Therefore the assessee‟s case is hit by Section 45(2) of the IT Act for the sake of convenience and ready reference the said section is reproduced as under: “Notwithstanding anything containing contained in sub- section (I), the profits or gains arising from the transfer by way of conversion by the owner of all capital asset shall into, or its treatment by him as stock in trade of a business carried on by him shall be chargeable to income tax as his income of his 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 conversion or treatment shall be deemed to be full value of the consideration received or accruing as a result of the transfer of the capital asset.” 2.4 As stated earlier by the development agreement dated 12.03.2008 the assessee has received part sales consideration in cash of Rs 6,00,00,000/- and the balance sales consideration is to be received in the form of 15% of the constructed area as and when the building is completed. Therefore it can be said ITA. No. 598/Mum/2021 Assessment Year: 2010-11 8 that till date the said agreement is not complete. Even otherwise the assessee has transferred only the development rights to the said M/s Beejay Realtors Pvt. Ltd., and even as on date the assessee is the owner of the land. By virtue of the said development rights the developer has only given right to enter upon the said land belonging to the assessee for the purpose of carrying out construction activities. Thus, it again needs to be mentioned that the land in question belonging to the assessee has not been transferred or conveyed to the said developer. Therefore as per the aforesaid provision u/s 45(2) of the IT Act, the capital gains arises to the assessee in the year of transfer of the stock in trade and the transfer of stock in trade can be said to have happened once the part sales consideration in the nature of 15% of the constructed area in the building is received by the assessee and the year in which this part sales consideration is received the capital gains is taxable in the hands of the assessee and for that purpose section 48 of the IT Act, the sales consideration received will be the market value as on the date of conversion of capital asset into stock in trade, which in this case is Rs. 19,90,71,000/- being the market value determined by the Stamp valuation authority. 2.5 in view of the above facts of the case and in law capital gains arising on the said transaction of land is not brought to tax in this assessment year and the same shall be done in the year in which the same is taxable as per provisions u/s 45(2) of the IT Act.” (Emphasis Supplied) 3.7. By way of the present appeal, the Appellant has challenged the order passed by PCIT setting aside the above order dated 31.12.2017 passed in reassessment proceedings under Section 143(3) read with Section 147 of the Act as being erroneous in so far as prejudicial to the interest of Revenue invoking provisions of Explanation 2 to Section 263 of the Act. The Appellant herein had also challenged the above order, dated 31.12.2017, passed in reassessment proceedings in appeal before CIT(A). ITA. No. 598/Mum/2021 Assessment Year: 2010-11 9 4. The Ld. Authorised Representative for the Appellant took us through the Development Agreement and the SA to support the claim that no further rights have been granted to the Appellant by way of SA and submitted that the PCIT fell in error in holding that the capital gains arose during the previous year relevant to the Assessment Year 2010-11. He submitted PCIT has passed the order impugned herein in violation of principle of natural justice and the same is also time barred. In response thereto, the Ld. Departmental Representative submitted that the PCIT has, in the order passed under Section 263 of the Act, dealt with all the contentions raised by the Appellant vide letter dated, 25.03.2021 and no prejudice has been caused to the Appellant. She submitted that the grounds raised by the Appellant are without any merit as the Assessing Officer had failed to make the necessary verification/inquiry and in this regard, she relied upon the order passed by the PCIT. 5. We have considered the rival submissions and perused the material on record. 6. The Appellant has invoked the provisions of Section 263(2) of the Act to contend that the order passed by the PCIT is barred by limitation as it has been passed after the expiry of two years from the end of the financial year in which order sought to be revised has been passed. The order under Section 143(3) read with Section 147 of the Act was passed on 31.12.2017 and the order under Section 263 of the Act has been passed on 31.03.2021. Though the order impugned herein has been passed after the expiry of period of two years specified in Section 263(2) of the Act, it has been passed within the extended period specified in Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020, dated 31.03.2020 read with Notification dated 24.06.2020 issued thereafter. The PCIT has, in paragraph 4.2 of the order, rightly held as under: ITA. No. 598/Mum/2021 Assessment Year: 2010-11 10 “4.2 The claim of the assessee that the initiation of proceedings u/s 263 is time barred, beyond the period of limitation as envisaged u/s 263 of the Act, is not correct. The assessee has got its facts wrong. As per the provisions of Section 263(2) of the Income Tax Act, no order shall be made under section 263 after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. In the instant case, the assessment order dated 31.12.2017 is being sought to be revised and as such, the limitation period for passing order U/s 263 would have ended on 31.03.2020. However, the disruption caused by COVID-19 compelled the government a complete lockdown w.e.f. 25.03.2020 and vide Ordinance the time limit has been extended to 31.03.2021. As such, the action of revision is well within the time limit as per the provisions of Section 263 of the I.T. Act.” (Emphasis Supplied) In view of the above, we do not find any merit in the contentions of the Appellant that order passed by PCIT is time barred. 7. The Appellant has also challenged the order passed by PCIT under Section 263 of the Act on the ground that the Assessment Order passed under Section 143(3) read with Section 147 of the Act stood merged with the order passed by Commissioner of Income Tax (Appeals), dated 23.04.2019 in appeal filed by the Appellant against the Assessment Order, 31.12.2017 passed in the reassessment proceedings, and therefore, the revision order passed by PCIT under Section 263 of the Act is illegal. We do not find any merit in this contention as the subject matter of the appeal filed by the Appellant before CIT(A) and the issue raised by the PCIT in proceedings under Section 263 of the Act are different. We note that the Appellant had challenged the findings of the Assessing Officer relating to conversion of capital asset by the Appellant into stock-in-trade and the taxability of the same in the year of sale or transfer in terms of Section 45(2) of the Act in appeal before CIT(A). Whereas in paragraph 2.11 of the letter, dated 25.03.2021, filed by the Appellant in response to show cause notice under Section 263 of the Act, the ITA. No. 598/Mum/2021 Assessment Year: 2010-11 11 Appellant has supported the findings of the Assessing Officer by submitting that the view adopted by Assessing Officer is the only view possible. Clearly the subject matter of the appellate proceedings before CIT(A) and the revisions proceedings before PCIT was different. The PCIT has exercised powers of revision under Section 263 of the Act in relation to capital gains arising from the transaction involving transfer of the Property and/or the development rights therein in terms of the Development Agreement and the SA. Therefore, the challenge to the order passed by the PCIT on the ground of merger of Assessment Order with order passed in appeal is rejected. 8. The Appellant has also contended that no capital gains liability has arisen in the hands of the Appellant during the Assessment Year 2010-11 and therefore, the order passed by the Assessing Officer cannot be held to be erroneous. We note that the reasons recorded for reopening assessment clearly stated that the Appellant had not offered capital gains to tax even though all the conditions of transfer under section 2(47)(v) of the Act read with section 53A of the Transfer of Property Act, 1882 were satisfied in the case of the Appellant for the Assessment Year 2010-11. PCIT noted that the Assessing Officer did not examined this issue while passing order, dated 31.12.2017 under Section 143(3) read with Section 147 of the Act and therefore, issued notice, dated 23.03.2021, to the Appellant fixing 25.03.2021 as date of hearing. The Appellant filed letter, dated 25.03.2021, inter alia, highlighting the ill health of the directors as well as insufficient time granted to present the case. While the Ld Departmental Representative has submitted that no prejudice has been caused to the Appellant, we note that the Appellant had only one clear day to respond to notice and present in case. Thus, in the facts and circumstances of the case, we are of the view that it would be in the interest of justice to grant the Appellant a reasonable opportunity of presenting his case before PCIT on the merits and ITA. No. 598/Mum/2021 Assessment Year: 2010-11 12 therefore, we remand the matter to the file of the PCIT for passing fresh order under Section 263 of the Act after giving the Appellant a reasonable opportunity of being heard. 9. In view of the above, Ground No. 2.3(i) and 2.3(ii) are dismissed. Ground No. 1.1 and 1.2 is allowed in terms of paragraph 8 above. All the other grounds raised by the Appellant are disposed off as being infructuous in view of the fact that we have, in para 8 above, remanded the matter to the file of PCIT for passing fresh order under Section 263 of the Act. 10. In result the appeal is partly allowed. Order pronounced on 20.05.2022. Sd/- Sd/- (Pramod Kumar) Vice President (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 20.05.2022 Alindra, PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai