ITO, Nashik V. Shri Devendrasingh Avtar Singh Sethi, Nashik

ITA 825/PUN/2007

• Counselvise Citation: 82524514 RSA 2007
• Duration Of Justice: 4 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-01-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 06-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Assessee Lawyers: SUNIL PATHAK
• Keywords: Capital asset; Business income; Fair market value
• Section: 45(2); 2(14)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE BEFORE SHRI I.C. SUDHIR JUDICIAL MEMBER AND SHRI G.S. PANNU ACCOUNTANT MEMBER ITA NO. 825/PN/2007 (ASSTT. YEAR : 2001-02 ) INCOME TAX OFFICER ... APPELLANT WARD-2(1), NASHIK V. SHRI DEVENDARSINGH AVTAR SINGH SETHI RESPONDENT SETHI NIWAS, OLD AGRA ROAD, OPP. KALIKA MANDIR, NASHIK APPELLANT BY : SHRI. S.K. AMBASTHA RESPONDENT BY : S/SHRI SUNIL PATHAK & NIKHIL PATHAK DATE OF HEARING :11/1/12 DATE OF PRONOUNCEMENT : -3-12 ORDER PER I.C. SUDHIR, JM THE REVENUE HAS QUESTIONED THE FIRST APPELLATE ORD ER ON THE GROUND THAT LD CIT(A) HAS ERRED IN DIRECTING TO ASSESS TH E CAPITAL GAIN ON SALE OF ALLOTTED 45% OF THE BUILT UP AREA IN THE YEAR OF SALE AND TO D ELETE THE ADDITION TOWARDS CONSIDERATION RECEIVABLE ON TRANS FER OF CAPITAL ASSET BEING PIECE OF LAND GIVEN FOR DEVELOPMENT. 2. THE RELEVANT FACTS AS PER THE ASSESSMENT ORDER ARE THAT THAT UNDER A DEVELOPMENT AGREEMENT THE ASSESSEE WITH TWO CO-O WNERS HAD TRANSFERRED LAND BEARING SURVEY NO. 547 A1B ID, M EASURING 3839 SQ. MTRS. SITUATED WITHIN LIMIT OF MUNICIPAL CORPORATI ON TO M/S. G.N.J. ASSOCIATES FOR THE TOTAL CONSIDERATION OF RS.2,74,5 0,000/- OUT OF WHICH RS. 50,00,000/- REPRESENTED THE CASH AND THE BALANCE FO R THE VALUE OF PROPOSED CONSTRUCTED BUILT UP SALEABLE AREA OF 45% PROPORTIONATELY ON ALL THE FLOORS, IN PREVIOUS YEAR RELEVANT TO THE ASSESS MENT YEAR UNDER CONSIDERATION. THE CLAIM OF THE ASSESSEE REMAINED THAT THE CONSIDERATION TOWARDS 45% CONSTRUCTED BUILT UP AREA HAS TO BE TAXED IN ITA . NO.825//PN/2007 SHRI DEVENDRARSINGH AVTAR SINGH SETHI A.Y. 2001-02 PAGE OF 6 2 THE YEAR OF RECEIPT OF ALLOTTED CONSTRUCTED AREA T O THEM. THE A.O. DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. THE LD CIT(A) HA S, HOWEVER, ACCEPTED THE SAME. 3. THE CONTENTION OF THE LD. D.R. REMAINED THAT TH E A.O HAD MADE ADDITION IN QUESTION IN ACCORDANCE WITH THE PROVISI ONS OF SECTION 45(2) OF THE ACT. THE LD CIT(A) WAS THUS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE A.O. HE PLACED RELIANCE ON THE ASSESSM ENT ORDER. 4. THE LD. A.R., ON THE OTHER HAND, TRIED TO JUSTIF Y THE FIRST APPELLATE ORDER. HE ALSO REFERRED PAGE NOS. 1 TO 34 OF THE P APER BOOK I.E. COPIES OF SUBMISSIONS MADE BEFORE THE CIT(A); DECLARATION FO R CONVERSION OF LAND INTO STOCK-IN-TRADE AND THE DEVELOPMENT AGREEMENT. HE ALSO REFERRED DEFINITION OF SALE AND THE CONTRACT FOR SALE. THE LD. A.R. ALSO REFERRED DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF B.V. KODRE (HUF) VS. ITO, ITA NO. 834/PN/2008 (A.Y. 2004 -05), ORDER DATED 4.10.2011 HOLDING THAT SINCE THE ASSESSEE HAD NOT R ECEIVED FULL CONSIDERATION NOR HANDED OVER POSSESSION OF THE PR OPERTIES, CAPITAL GAINS CANNOT BE ASSESSED IN THE YEAR OF EXECUTION OF THE DEVELOPMENT AGREEMENT. 5. THE LD. A.R. SUBMITTED FURTHER THAT THE CONVERS ION OF LAND IN STOCK- IN-TRADE HAS NOT BEEN QUESTIONED BY A.O. THE ASSE SSEE BY MISTAKE HAD OFFERED TAX U/S. 45(2) FOR THE PART AMOUNT RECEIVE D AND THE SAME CANNOT BE ACCEPTED UNDER THE FACTS AND CIRCUMSTANCE S OF THE PRESENT CASE FOR MAKING JUST AND PROPER ASSESSMENT. HE SUBMITTE D THAT BUSINESS INCOME ARISES WHEN ASSESSEE RECEIVES 45% OF THE CO NSTRUCTED AREA AS PER DEVELOPMENT AGREEMENT AND THE PROPERTY PASSES TO THE BUYERS FROM ASSESSEE. BUILDER HAS BEEN GIVEN ONLY LICENCE TO C OMPLETE THE ITA . NO.825//PN/2007 SHRI DEVENDRARSINGH AVTAR SINGH SETHI A.Y. 2001-02 PAGE OF 6 3 CONSTRUCTION AS PER THE TERMS OF THE DEVELOPMENT AG REEMENT. HE SUBMITTED FURTHER THAT AGREEMENT AS A WHOLE IS TO B E CONSIDERED. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS : 1) SMT. RAJARANI DEVI RAMNA VS. CIT (1993), 201 IT R 1032(PAT.) 2) AZIENDE COLORI NAZIONALI AFFINI VS. CIT, 110 I TR 145 (BOM.) 3) GENERAL GLASS CO., (P) LTD., 14 SOT 32 (BOM) 4) ITO VS. SMT. SATHIAVATHI DEVI VERMA, 124 ITD 46 7 (DEL.) 5) DCIT VS. CREST HOTELS LTD. (2001) 78 ITD 213 (M UM) 6. THE LD. D.R. RE-JOINED WITH THIS CONTENTION THA T DEVELOPMENT AGREEMENT ALSO AMOUNTS TO TRANSFER OF THE PROPERTY . THE PLOT OF LAND HAS BEEN TRANSFERRED TO THE DEVELOPER VIDE DEVELOPM ENT AGREEMENT. 7. WE FIND THAT TWO ISSUES ARE INVOLVED IN THE PRE SENT CASE. FIRST IS YEAR OF ASSESSABILITY OF THE INCOME EARNED FROM THE TRANSACTION AND SECONDLY, WHAT IS THE NATURE OF TRANSACTION I.E. CA PITAL OR REVENUE. THE CLAIM OF THE ASSESSEE REMAINED THAT BY ENTERING IN TO DEVELOPMENT AGREEMENT TO DEVELOP THE BUSINESS ASSET I.E. STOCK -IN-TRADE, THE ASSESSEE HAD NOT TRANSFERRED HIS STOCK-IN-TRADE TO THE DEVELOPER ON THE DATE OF DEVELOPMENT AGREEMENT. IT WAS CLAIMED THAT THE DEFINITION OF TRANSFER AS PER SECTION 2(47) IS APPLICABLE TO CAP ITAL ASSETS AND NOT TO BUSINESS ASSETS I.E. STOCK-IN-TRADE AS THE DEFINITI ON OF CAPITAL ASSET AS PER SECTION 2(14) SPECIFICALLY EXCLUDES STOCK-IN-TRADE. THE LD CIT(A) HAS ACCEPTED THIS CONTENTION OF THE ASSESSEE. HAVING G ONE THROUGH THE DEFINITION OF TRANSFER PROVIDED U/S. 2(47) IN REL ATION TO CAPITAL ASSET AND THE TERM CAPITAL ASSET DEFINED IN SECTION 2(14) OF THE ACT, WE DO NOT FIND INFIRMITY IN THE FIRST APPELLATE ORDER IN HOLDING T HAT DEFINITION OF TRANSFER U/S. 2(4) IS NOT APPLICABLE TO THE TRANSFER OF THIS CONVERTED ASSET INTO ITA . NO.825//PN/2007 SHRI DEVENDRARSINGH AVTAR SINGH SETHI A.Y. 2001-02 PAGE OF 6 4 STOCK-IN-TRADE. THE A.O HAS TAXED THE CAPITAL GAI N STATING THAT AS PER PROVISIONS OF SECTION 45(2), THE FAIR MARKET VALUE OF THE CAPITAL ASSETS ON THE DATE ON WHICH THE ASSET WAS CONVERTED INTO STOC K-IN-TRADE SHALL BE DEEMED TO BE FAIR MARKET VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER OF THE CAPITAL ASSET. THE PROVISIONS OF SEC. 45(2) OF THE ACT ARE BEING REPRODUCED BELOW, FOR A READ Y REFERENCE : 45(2) NOT WITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET 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 THE PREVIOUS YEAR IN WH ICH 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 DATE 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. HAVING GONE THROUGH THE ABOVE PROVISION, WE CONCUR WITH THE FINDING OF THE LD CIT(A) THAT A.O HAS IGNORED THE PART OF TH E SECTION WHICH PROVIDES THAT IN THE CASE OF CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE OF BUSINESS, THE CAPITAL GAIN IS CHARGEABLE TO TAX, AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED. 8. IN THE PRESENT CASE, VIDE DEVELOPMENT AGREEMENT CLAUSE NO. X(IC) AND X(J), THE PARTIES I.E. ASSESSEE AND DEVELOPER H AVE AGREED UPON WITH REWARDS OF OWNERSHIP OF THE PROPERTY SHALL BE TRAN SFERRED TO THE BUYERS ONLY ON RECEIPT OF 45% CONSTRUCTED AREA BY THE ASSE SSEE AND OTHER 2 CO- OWNERS FROM THE DEVELOPER. THAT 45% CONSTRUCTED AREA WAS LIKELY TO BE DELIVERED TO THE ASSESSEE IN F.Y. 2007-08 RELEVA NT TO A.Y. 2008-09. THE CONTENTION OF THE ASSESSEE REMAINED THAT ON EN TERING INTO THE ITA . NO.825//PN/2007 SHRI DEVENDRARSINGH AVTAR SINGH SETHI A.Y. 2001-02 PAGE OF 6 5 DEVELOPMENT AGREEMENT, THE STOCK-IN-TRADE I.E. CO NVERTED ASSET DOES NOT GET TRANSFERRED TO THE DEVELOPER. IT WAS CONTE NDED THAT REVENUE IS TO BE RECOGNIZED IN THE YEAR IN WHICH SIGNIFICANT RE WARDS OF OWNERSHIP IS TRANSFERRED TO THE BUYER. IN THE CASE OF B.V. KODR E (HUF) VS. ITO (SUPRA), THE PUNE BENCH OF THE TRIBUNAL AFTER DISCU SSING THE ISSUE AND THE DECISIONS RELIED UPON HAS COME TO THE CONCLUSION TH AT CAPITAL GAINS CANNOT BE ASSESSED IN THE YEAR OF EXECUTION OF THE DEVELOP MENT AGREEMENT IN ABSENCE OF RECEIPT OF FULL CONSIDERATION AND HANDIN G OVER POSSESSION OF THE PROPERTY. IN THAT CASE, THE ASSESSEE HAD ENTER ED INTO A DEVELOPMENT AGREEMENT WHEREBY THE ASSESSEE GAVE RIGHTS OF DEVEL OPMENT OF AN AGRICULTURAL LAND TO THE DEVELOPER. THE DEVELOPMEN T AGREEMENT WAS STAMPED UNDER ARTICLE 5 (GA) OF SCHEDULE 1 OF THE BOMBAY STAMP ACT 1958. UNDER THE SAID ARTICLE, STAMP DUTY WAS LEVIA BLE AT THE RATE OF 1%. THE SAID ARTICLE APPLIED IF THE POSSESSION OF THE PROPERTY WAS NOT HANDED OVER. IN CASES WHERE POSSESSION OF PROPERTY IS HAN DED OVER, THE INSTRUMENT WOULD BE COVERED BY ARTICLE 25 AND THE S TAMP DUTY LEVIABLE WOULD BE 5%. CLAUSE 10 OF THE AGREEMENT PROVIDED T HAT POSSESSION WOULD BE GIVEN TO THE DEVELOPER ON RECEIPT OF FULL PAYMENT OF CONSIDERATION. OF THE TOTAL CONSIDERATION OF RS. 6 0 LAKHS, THE AMOUNT OF RS. 38,48,150/- ONLY WAS GIVEN BY THE DEVELOPER TO THE ASSESSEE. SIMILAR VIEW HAS BEEN EXPRESSED BY THE MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF DCIT VS. CREST HOTELS LTD. (SUPRA). IN THAT CASE, HOTEL BUSINESS WAS DISCONTINUED AND THE CAPITAL ASSETS CO MPRISING OF LAND AND BUILDING OF THE HOTEL BUSINESS WERE CONVERTED INTO STOCK-IN-TRADE OF THE CONSTRUCTION BUSINESS IN THE FORM OF RESIDENTIAL C OMPLEX. SAID STOCK-IN- TRADE WAS SOLD IN LATER YEARS. IT WAS HELD BY THE TRIBUNAL THAT TAX ON CAPITAL GAIN IS TO BE LEVIED IN THE SAME YEARS IN W HICH BUSINESS PROFITS ARISES TO THE ASSESSEE ON SALE OF SUCH ASSET AS ENV ISAGED BY SECTION 45(2) OF THE ACT. IT WAS HELD THAT ASSESSEE ITSEL F HAVING RECOGNIZED ITA . NO.825//PN/2007 SHRI DEVENDRARSINGH AVTAR SINGH SETHI A.Y. 2001-02 PAGE OF 6 6 BUSINESS PROFITS AS SALE OF CONVERTED ASSET IN TH E YEARS UNDER CONSIDERATION, TAX ON CAPITAL GAIN ON CONVERSION I S TO BE LEVIED IN THESE YEARS ACCORDING TO THE AREA SOLD BY THE ASSESSEE IN EACH YEAR. ALMOST SIMILAR ARE THE FACTS OF THE PRESENT CASE BEFORE U S. WE THUS DO NOT FIND INFIRMITY IN THE FIRST APPELLATE ORDER IN HOLDING T HAT THE CAPITAL GAIN IS TO BE ASSESSED IN THE HANDS OF THE ASSESSEE AND OTHER 2 CO-OWNERS IN THE YEAR OF RECEIPT OF 45% CONSTRUCTED AREA BY THEM FRO M THE DEVELOPER. THE LD CIT(A) WAS ACCORDINGLY JUSTIFIED IN DIRECTI NG THE A.O TO DELETE THE ADDITION TO CAPITAL GAIN MADE BY HIM IN THE YEAR U NDER CONSIDERATION. THE SAME IS ACCORDINGLY REJECTED. 9. IN RESULT, APPEAL IS DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 6TH M ARCH 2012. SD/- SD/- ( G .S. PANNU ) ACCOUNTANT MEMBER ( I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 6TH MARCH, 2012 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT I, NASHIK . THE CIT(A)- I, NASHIK 5. THE D.R. A BENCH, PUNE 6. GUARD FILE /-TRUE COPY-/ BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE