PRADEEP VATRANA, Alwar V. DCIT, Alwar

ITA 930/JPR/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2064 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 25-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P P MEENA
• Keywords: Capital asset; Business income; Retrospective amendment; Cost of acquisition; Date of conversion; Fair market value; Tax effect
• Section: 45(2); 54

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH FOT; IKWY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA -@ ITA. NO. 930/JP/2016 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2012-13 PRADEEP VATRANA C/O M/S K.L.DATTA & CO. CA. VASHITHA PLAZA 2, MANNU MARG, ALWAR CUKE VS. DCIT, CIRCLE-2, ALWAR LFKK;H YS[KK LA -@THVKBZVKJ LA -@ PAN/GIR NO.: AAQPV7801C VIHYKFKHZ@ APPELLA NT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI P.C. PARWAL (CA) JKTLO DH VKSJ LS @ REVENUE BY : SHRI P. P. MEENA (JCIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 15/01/2018 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT : 27/02/2018 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A), ALWAR DATED 28.09.2016 FOR ASSESSMENT YEAR 2012-13 WHEREIN THE RESPECTIVE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT FOLLOWING THE DECISION OF LD. CIT(A), ALWAR FOR AY 2010-11 IN ASSESSEES OWN CASE EVEN WHEN THERE IS NO CHANGE IN THE FACTS AND THE CIRCUMSTANCES OF THE CASE. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 2 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING A SUM OF RS. 80,45,182/- AS BUSINESS INCOME AS AGAINST CAPITAL GAIN OF RS. 52,73,855/- DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME. 3. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN NOT ALLOWING THE CLAIM OF DEDUCTION U/S 54 OF RS. 20 LAKHS. 4. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN NOT ALLOWING THE INDEXATION BENEFIT ON THE DEVELOPMENT AND OTHER EXPENSES OF RS. 16,17,418/-. 2. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT THE ASSESSEE DERIVES INCOME FROM INTEREST, RENT AND SHARE TRADING. HE FILED THE RETURN DECLARING INCOME OF RS. 58,68,080/- WHICH INCLUDED LONG TERM CAPITAL GAIN OF RS.32,73,855/- AFTER CLAIMING DEDUCTION U/S 54 OF RS. 20 LAKHS. 2.1 IN COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE EXPLAINED THAT HE WAS HAVING A LAND AT KHASRA NOS. 9, 12, 26 AND 27 AT VILLAGE LIVARI, AJMER WHICH WAS PURCHASED BY HIM FOR RS. 4,40,000/- FROM SHRI MADAN MOHAN BATWARA ON 17.10.1996. ON THIS LAND, THERE WAS AN AGRICULTURAL CONNECTION AND THE LAND WAS USED FOR AGRICULTURAL PURPOSE AS IS EVIDENT FROM KHASRA GIRDAVARI. THE ASSESSEE HAS SHOWN THE SAID AGRICULTURAL LAND IN HIS PERSONAL BALANCE SHEET UNDER THE HEAD FIXED ASSETS AND AGRICULTURAL INCOME WAS ALSO DECLARED IN THE RETURN OF INCOME FOR AYS 2003-04 TO 2005-06. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 3 2.2 IN THE MEANWHILE, THE ASSESSEE APPLIED FOR CONVERSION OF THIS AGRICULTURAL LAND FOR USE OF RESORT TO URBAN IMPROVEMENT TRUST, ALWAR AND ACCORDINGLY A LEASE DEED WAS EXECUTED ON 04.07.2003 FOR CONVERTING THE SAID PLOT OF LAND AS A RESORT PLOT. A RESIDENTIAL HOUSE OVER A PART OF THE SAID LAND WAS CONSTRUCTED IN THE YEAR 2003 FOR THE ASSESSEES OWN USE AS WELL AS LET OUT PURPOSE. FROM THE YEAR 1996 TO 2005, ASSESSEE USED THE SAID LAND FOR AGRICULTURAL PURPOSE. THEREAFTER, HE LET OUT THE LAND TO A CONTRACTOR TO USE FOR MARRIAGE AND SOCIAL FUNCTIONS UNDER THE NAME OF GEORGIA RESORT. THIS ACTIVITY CONTINUED TILL 31.07.2009. 2.3 THEREAFTER THE ASSESSEE AGAIN GOT THE LAND CONVERTED FROM RESORT TO RESIDENTIAL THROUGH UTI VIDE ITS ORDER DATED 31.07.2009 AND GOT THE PLANS APPROVED. ON THIS LAND, ASSESSEE CARVED OUT 20 PLOTS TO HAVE BETTER REALISATION OF HIS CAPITAL ASSET. OUT OF THESE PLOTS, 3 PLOTS WERE SOLD IN AY 2010-11, 1 PLOT IN AY 2011-12 AND 5 PLOTS WERE SOLD IN THE YEAR UNDER CONSIDERATION. 2.4 IN AY 2010-11, THE AO CONSIDERED THE ABOVE TRANSACTIONS AS ADVENTURE IN THE NATURE OF TRADE AND ACCORDINGLY ASSESSED THE LONG TERM CAPITAL GAIN OF RS. 49,47,253/- AS BUSINESS INCOME. IN APPEAL, THE LD. CIT(A) VIDE ORDER DATED 18.11.2014 AFTER CONSIDERING THE FACTS OF THE CASE AND ALSO THE VARIOUS CASE LAWS INCLUDING THE DECISION OF HONBLE RAJASTHAN HIGH COURT DIRECTED THE AO TO ASSESS THE INCOME FROM SALE OF THESE PLOTS UNDER THE HEAD INCOME FROM CAPITAL GAINS. THE APPEAL OF THE DEPARTMENT AGAINST THIS ORDER BEFORE THE HONBLE ITAT WAS DISMISSED VIDE ORDER DATED 17.12.2015 ON ACCOUNT OF LOW TAX EFFECT. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 4 2.5 THE AO FOLLOWING THIS ORDER FOR AY 2010-11, HELD THAT 5 PLOTS SOLD DURING THE YEAR IS AN ADVENTURE IN THE NATURE OF TRADE AND THEREBY ASSESSED THE SURPLUS OF RS. 80,45,182/- AS BUSINESS INCOME AS AGAINST RS. 52,73,855/- DECLARED BY THE ASSESSEE AS LONG TERM CAPITAL GAIN. 2.6 THE LD. CIT(A) WITHOUT FOLLOWING THE ORDER OF HIS PREDECESSOR CIT(A), AFTER QUOTING THE DECISION OF HONBLE SUPREME COURT IN CASE OF G. VENKATAS SWAMI NAIDU VS. CIT 35 ITR 594, HELD THAT THE PRINCIPLE LAID DOWN IN THE SAID CASE IS APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CASE OF CIT VS. SOHAN KHAN AND MOHAN KHAN 304 ITR 194 IS DISTINGUISHABLE ON FACTS. THEREFORE, BY NOT FOLLOWING THE ORDER OF HIS PREDECESSOR CIT(A), HE UPHELD THE ORDER PASSED BY THE AO. 2.7 IT WAS SUBMITTED THAT THIS ISSUE WAS FIRST RAISED BY THE AO IN AY 2010-11 WHERE HE CONSIDERED THE SALE OF 3 PLOTS DURING THAT YEAR AS ADVENTURE IN THE NATURE OF TRADE AND ASSESSED THE INCOME THERE FROM AS BUSINESS INCOME AS AGAINST INCOME FROM CAPITAL GAIN DECLARED BY THE ASSESSEE. HOWEVER, THE LD. CIT(A) AFTER CONSIDERING THE ENTIRETY OF THE CASE VIDE ORDER DATED 24.11.2014 HELD THAT THE PROFIT EARNED ON SALE OF PLOT HAS TO BE ASSESSED AS INCOME FROM CAPITAL GAIN. THUS ONCE THIS ISSUE IS DECIDED BY THE PREDECESSOR LD. CIT(A) IN FAVOUR OF THE ASSESSEE, WITHOUT ANY DISTINGUISHABLE FACTS, THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE INCOME FROM SALE OF PLOTS DURING THE YEAR IS TO BE ASSESSED AS BUSINESS INCOME. IT IS A SETTLED PRINCIPLE OF LAW THAT THE APPELLATE AUTHORITIES SHOULD RESPECT THE ORDERS OF OTHER AUTHORITIES ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 5 IN SAME HIERARCHY. IN THIS CONNECTION REFERENCE IS MADE TO THE DECISION OF HONBLE SUPREME COURT IN CASE OF RADHASAOMI SATSANG VS. CIT 193 ITR 321. AGAIN THE HONBLE SUPREME COURT IN CASE OF PARASHURAM POTTERY WORKS CO. LTD. VS. ITO 1977 CTR 32 / (1977) 106 ITR 1 HELD AS UNDER: 'AT THE SAME TIME, WE HAVE TO BEAR IN MIND THAT THE POLICY OF LAW IS THAT THERE MUST BE A POINT OF FINALITY IN ALL LEGAL PROCEEDINGS, THAT STALE ISSUES SHOULD NOT BE REACTIVATED BEYOND A PARTICULAR STAGE AND THAT LAPSE OF TIME MUST INDUCE REPOSE IN AND SET AT REST JUDICIAL AND QUASI- JUDICIAL CONTROVERSIES AS IT MUST IN OTHER SPHERES OF HUMAN ACTIVITY.' IN VIEW OF ABOVE, THE LD. CIT(A) WAS NOT JUSTIFIED IN NOT FOLLOWING THE DECISION OF HIS PREDECESSOR IN ASSESSEES OWN CASE ON THE SAME ISSUE AND FOR THIS REASON ITSELF, THE ORDER PASSED BY HIM BE REVERSED. 2.8 IT MAY BE NOTED THAT THE LD. CIT(A) IN AY 2010-11 IN PARAS 4.14 TO 4.19, HAS GIVEN A DETAILED FINDING ON THIS ISSUE AFTER CONSIDERING THE DECISION OF HONBLE SUPREME COURT IN CASE OF G. VENKATAS SWAMI NAIDU & CO. VS. CIT 35 ITR 594 WHICH IS RELIED BY THE LD. CIT(A) IN THE YEAR UNDER CONSIDERATION. IN THIS ORDER THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CASE OF SOHAN KHAN AND MOHAN KHAN VS. CIT 304 ITR 194 IS CONSIDERED WHERE THE DECISION OF THE HONBLE SUPREME COURT(SUPRA), IS DISTINGUISHED. CONSIDERING THE SAME THE LD. CIT(A) IN PARA 4.18 OF HIS ORDER HELD AS UNDER: ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 6 THUS IN VIEW OF THE ABOVE DISCUSSION, I FIND THAT AGRICULTURAL LAND WAS PURCHASED IN THE YEAR 1996 AND HAS BEEN USED SINCE THEN FOR AGRICULTURAL PURPOSES, LATER GIVEN ON RENT FOR USE AS A RESORT AND FINALLY PLOTTED THE SAME FOR SALE AS RESIDENTIAL PLOTS. THE INCOME EARNED FROM THE USE OF LAND DURING THE LAST ABOUT 15 YEARS HAS BEEN SHOWN BY THE APPELLANT AND ACCEPTED BY THE AO. THERE HAS BEEN NO MATERIAL BROUGHT ON RECORD BY THE AO TO THE EFFECT THAT APPELLANT HAS ENTERED INTO MANY TRANSACTIONS OF PURCHASE OF LAND AND SALE OF LAND IN LAST 15 YEARS OR SO. FURTHER, THE INTENTION OF THE APPELLANT AT THE TIME OF PURCHASE OF LAND HAS NOT BEEN DOUBTED AND STANDS PROVED WITH THE SEQUENCE OF EVENTS WITH REGARDS TO THE USAGE OF LAND AND INCOME EARNED THERE FROM OVER A PERIOD OF TIME. THE MERE FACT THAT LAND HAS BEEN SOLD IN PARTS BY ENTERING INTO A SERIES OF TRANSACTIONS FOR SALE OF LAND ONLY, RATHER THAN SELLING THE LAND IN ONE GO, CANNOT BE HELD AS AN ACTIVITY IN THE NATURE OF TRADE. 2.9 THE LD. CIT(A) FOR THE YEAR UNDER CONSIDERATION, AFTER REPRODUCING THE FACTORS RELEVANT FOR DECIDING THE CHARACTER OF THE TRANSACTION, AS STATED BY THE SUPREME COURT IN 35 ITR 594, IN PARA 5.3.3 HAS OBSERVED THAT THE MOTIVE, INTENTION AND REALISATION OF THE ENTIRE SCHEME OF THINGS ADOPTED BY THE APPELLANT WAS TO MAXIMIZE THE VALUE OF THE ASSET AND USING IT FOR BUSINESS PURPOSE. THIS IS FACTUALLY INCORRECT IN AS MUCH AS THE ASSESSEE NEVER PURCHASED THE AGRICULTURAL LAND AS A TRADER. HE ACQUIRED THE LAND WITH INTENTION TO HOLD IT AND HAVE AGRICULTURAL INCOME BY CULTIVATION. THE AGRICULTURAL LAND WAS DECLARED IN THE RETURN UPTO AY 2005-06 WHICH IS ACCEPTED BY THE DEPARTMENT. THE ASSESSEE HAS NOT CARRIED OUT ANY DEALING IN THE REAL ESTATE IN EARLIER ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 7 YEARS. HE ONLY CONVERTED THE LAND USE FROM AGRICULTURAL TO RESORT AND THEN TO RESIDENTIAL FOR BETTER UTILISATION AND THEREAFTER FOR EXPLOITATION OF HIS CAPITAL ASSET. INFACT, THE FACTORS MENTIONED BY THE HONBLE SUPREME COURT, ARE SUPPORTIVE TO THE FACTS OF THE CASE OF THE ASSESSEE. 2.10 IN VARIOUS CASES, IT HAS BEEN HELD THAT PURCHASE OF LAND ONCE UPON A TIME AND THEREAFTER SELLING THE SAME IN PIECEMEAL AFTER DEVELOPMENT, THE PROFIT ARISING WOULD BE TAXED UNDER THE HEAD CAPITAL GAIN AND CANNOT BE TREATED AS ADVENTURE IN THE NATURE OF TRADE. SOME OF THESE DECISIONS ARE AS UNDER: COMMISSIONER OF INCOME-TAX VS. SOHAN KHAN & MOHAN KHAN [2008] 304 ITR 194 (RAJ) SAROJ KUMAR MAZUMDAR VS. COMMISSIONER OF INCOME TAX (37 ITR 242) (SC) JANKI RAM BAHADUR RAM VS. COMMISSIONER OF INCOME TAX (57 ITR 21) (SC) CIT VS. SURESHCHAND GOYAL 298 ITR 277 (MP) CIT VS. A MOHAMMED MOHIDEEN 176 ITR 393 (MADRAS) IN VIEW OF ABOVE, IT WAS SUBMITTED THAT THE AO BE DIRECTED TO ASSESS THE GAIN FROM SALE OF PLOTS AS LONG TERM CAPITAL GAIN AND AFTER ALLOWING DEDUCTION U/S 54 AND INDEXATION ON COST OF IMPROVEMENT, WORK OUT THE LONG TERM CAPITAL GAIN. 2.11 WITHOUT PREJUDICE TO ABOVE, IT WAS SUBMITTED BY THE LD AR DURING THE COURSE OF HEARING THAT EVEN IF IT IS HELD THAT ASSESSEE HAS CONVERTED ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 8 HIS LAND INTO STOCK IN TRADE, ITS TAXABILITY WOULD BE GOVERNED BY SECTION 45(2). THEREFORE, FMV OF THE ASSET ON THE DATE OF CONVERSION AS REDUCED BY THE INDEXED COST OF ACQUISITION AND COST OF IMPROVEMENT WILL BE ASSESSED UNDER THE HEAD CAPITAL GAIN AND EXCESS OVER SUCH FMV CAN ONLY BE BROUGHT TO TAX AS BUSINESS INCOME. 3. THE LD DR HAS VEHEMENTLY ARGUED THE MATTER AND RELIED UPON THE ORDER OF THE LOWER AUTHORITIES. THE LD DR ALSO RELIED ON THE ORDER OF RAJASTHAN HIGH COURT IN CASE OF VIMAL SINGHVI VS ACIT [2015] 55 TAXMANN.COM 309 FOR THE PROPOSITION THAT WHERE ASSESSEE HAVING PURCHASED AGRICULTURAL LAND, CONVERTED SAME INTO NON-AGRICULTURE LAND AND SOLD SAME WITHIN A SHORT SPAN OF TIME ON REGULAR BASIS TO COMPANIES, INCOME EARNED BY THE ASSESSEE WAS TAXABLE AS BUSINESS INCOME. 4. THE RELEVANT FINDINGS OF THE LD CIT(A) WHICH ARE UNDER CHALLENGE BEFORE US READS AS UNDER:- 5.3.1 I HAVE PERUSED THE ASSESSMENT ORDER AS WELL AS SUBMISSIONS MADE BY THE APPELLANT. FOLLOWING FACTS HAVE EMERGED: 1. THAT THE APPELLANT HAD PURCHASED AGRICULTURAL LAND ADMEASURING 10088.90 SQ. METER AS PER KHASRA NO. 9,12,26 AND 27 IN VILLAGE LIWARI, TEHSIL ALWAR THROUGH REGISTERED DEED DATED 17.10.1996 FOR AN AMOUNT OF RS. 4,40,000/- 2. THAT IN THE YEAR 2002, THE APPELLANT HAD GOT THE LAND USE CONVERTED FOR USE AS A RESORT BY THE NAGAR VIKAS NYAS, ALWAR. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 9 3. THAT THE APPELLANT WAS USING THE LAND UNDER THE NAME OF GEORGIA RESORT GIVING IT FOR USE FOR MARRIAGE AND SOCIAL FUNCTIONS ON PAYMENT BASIS. 4. THAT IN THE YEAR 2009, THE APPELLANT HAD AGAIN GOT THE LAND USE CHANGED FROM RESORT TO RESIDENTIAL PURPOSES. 5. THAT AFTER GETTING IT CONVERTED FOR RESIDENTIAL PURPOSES, THE APPELLANT HAS TAKEN APPROVAL FOR CARVING OUT 19 PLOTS ON 5386.50 SQ YARDS OUT OF TOTAL LAND OF 12060 SQ YARDS. 6. THAT AFTER PLOTTING IS DONE, THE APPELLANT HAS STARTED SELLING THE PLOTS. SOME OF THE PLOTS WERE SOLD LAST YEAR AND 5 OF SUCH PLOTS WERE SOLD DURING THE YEAR UNDER CONSIDERATION AND DECLARED THE INCOME AS LONG TERM CAPITAL GAIN. 7. THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD SOLD 5 PLOTS AND GOT TOTAL RECEIPTS OF RS. 97,16,600/-. 8. THAT THE AO HAD CONSIDERED THE INCOME ARISEN OUT OF THE ABOVE MENTIONED SALE AS BUSINESS INCOME BY TREATING IT AS ADVENTURE IN THE NATURE OF TRADE. 5.3.2 NOW, THE MOOT QUESTION IN THE PRESENT GROUNDS OF APPEAL IS WHETHER THE SALE OF PLOTS COMES UNDER THE PURVIEW OF ADVENTURE IN THE NATURE OF TRADE OR NOT. IN THIS REGARD, THE APPELLANT HAD CITED A LARGE NUMBER OF JUDICIAL PRONOUNCEMENTS IN FAVOUR OF ITS CLAIM. I HAVE GONE INTO THE PLETHORA OF JUDGMENTS CITED BY THE APPELLANT. HOWEVER THE GIST OF MOST THE CITED JUDGMENTS HINGE BROADLY ON THE PARAMETERS SET BY THE HONBLE SUPREME COURT IN THE CASE OF G. VENKATASWAMY NAIDU VS. CIT (1959) 35 ITR 594 ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 10 (SC). THEREFORE IT IS PERTINENT TO GO INTO THE RATIONALE AND THE PARAMETERS SET BY THE APEX COURT IN THE SAID JUDGMENT. THEREFORE, THE ABOVE MENTIONED JUDGMENT HAS LAID DOWN CERTAIN TESTS TO FIND OUT WHETHER A PARTICULAR TRANSACTION OF PURCHASE AND SALE WOULD AMOUNT TO AN ADVENTURE IN THE NATURE OF TRADE OR NOT, AND AT THE SAME TIME CAUTIONED THAT IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVANT FACTORS AND CIRCUMSTANCES THAT DETERMINE THE CHARACTER OF THE TRANSACTION. THE SUPREME COURT IN THAT CASE OBSERVED THAT THE FOLLOWING FACTORS ARE RELEVANT FOR DECIDING THE CHARACTER OF A TRANSACTION: (1) WAS THE PURCHASER, A TRADER AND WHETHER THE PURCHASE OF THE COMMODITY AND ITS RESALE ALLIED TO HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT? (2) WHAT IS THE NATURE OF COMMODITY PURCHASED AND SOLD AND IN WHAT QUANTITY WAS IT PURCHASED OR RESOLD? (3) DID THE PURCHASER BY ANY ACT SUBSEQUENT TO THE PURCHASE IMPROVE THE QUALITY OF COMMODITY PURCHASED AND THEREBY MADE IT MORE READILY RE-SALEABLE? (4) WHAT WERE THE INCIDENCES ASSOCIATED WITH THE PURCHASE AND SALE AND WHETHER THEY ARE AKIN TO THE OPERATIONS USUALLY ASSOCIATED WITH TRADE OR BUSINESS? (5) ARE THE TRANSACTIONS OF THE PURCHASE AND SALE REPEATED? (6) IN REGARD TO THE PURCHASE OF THE COMMODITY AND ITS SUBSEQUENT POSSESSION BY THE PURCHASER, DOES THE ELEMENT OF PRIDE OF POSSESSION COME INTO PICTURE? ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 11 5.3.3 NOW, APPLYING THE PARAMETERS SET BY THE HONBLE SUPREME COURT IN THE PRESENT CASE, THE SEQUENCE OF EVENTS LEADING TO THE EVENTUAL SALE OF THE LAND PLOTS DO NOT SEEM TO HELP THE CAUSE OF THE APPELLANT. THE APPELLANT HAD PURCHASED THE LAND WHICH WAS AN AGRICULTURAL LAND IN THE YEAR 1996. THEN GOT IT CONVERTED IN THE YEAR 2003 TO RESORT AND BRANDED IT AS GEORGE RESORTS UTILIZING IT AND GIVING IT ON PAYMENTS FOR THE PURPOSES OF MARRIAGE AND OTHER SOCIAL GATHERING. AGAIN THEREAFTER, IN THE YEAR 2009, GOT THE LAND USE CONVERTED TO RESIDENTIAL. THE APPELLANT HAS NOT STOPPED AT THAT, IT HAS GOT APPROVAL TO DO PLOTTING ON THE PART OF THE LAND ADMEASURING 5386.50 SQ YARD OUT OF TOTAL LAND OF 12,060 SQ. YARD. THE APPELLANT HAS CARVED OUT 19 PLOTS AND STARTED SELLING THOSE PLOTS AT A PREMIUM. THE AO HAS FURTHER BROUGHT ON RECORD THE FACT THAT THE APPELLANT HAS INSURED THE PLOTS AND DECLARE IT AS REAL ESTATE BUSINESS TO THE INSURANCE COMPANY. IF WE LOOK AT THE SEQUENCE OF EVENTS AS MENTIONED ABOVE, I HAVE NO DOUBT WHATSOEVER, THAT THE MOTIVE, INTENTION AND REALIZATION OF THE ENTIRE SCHEME OF THING ADOPTED BY THE APPELLANT WAS TO MAXIMIZE THE VALUE OF THE ASSET AND USING IT FOR BUSINESS PURPOSES. IN THAT PURSUIT THE APPELLANT HAD CONSTANTLY TRIED AND EXECUTED DIFFERENT METHODS AT DIFFERENT TIME EXPLOITING THE RESOURCES AND MAXIMIZE THE PROFIT OUT OF IT. IT IS A CONTINUOUS PROCESS RIGHT FROM THE PURCHASE OF LAND IN THE YEAR 1996 AND TILL DATE. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 12 IN THIS REGARD, I HAVE ALSO NOTED THE ABOVE MENTIONED APEX COURT JUDGMENT WHERE IT HAS SAID THAT JUST AS THE CONDUCT OF THE PURCHASER SUBSEQUENT TO THE PURCHASE OF A COMMODITY IMPROVING OR CONVERTING IT SO AS TO MAKE IT MORE READILY RESALABLE IS A RELEVANT FACTOR IN DETERMINING THE CHARACTER OF THE TRANSACTION, SO WOULD IS CONDUCT PRIOR TO PURCHASE BE RELEVANT IF IT SHOWS A DESIGN AND PURPOSE. I HAVE CLEARLY NOTED A PURPOSE AND DESIGN IN THE UTILIZATION OF THE LAND AND IT ALL POINTED TOWARDS A BUSINESS SENSE AND EVENTUALLY A BUSINESS TRANSACTION. THE APPELLANT HAS CITED HONBLE RAJASTHAN HIGH COURT JUDGMENT IN THE CASE OF SOHAN KHAN AND MOHAN KHAN AS REPORTED IN 304 ITR 194 (RAJ.), IN FAVOUR OF HIS CLAIM. I HAVE PERUSED THE JUDGMENT. HOWEVER, THE CONCLUDING PARA OF THE JUDGMENT HAS ITSELF SAID THAT: .......IT IS THE DIFFERENT STORY THAT THE QUESTION, AS TO WHETHER A PARTICULAR TRANSACTION FALLS WITHIN THE CATEGORY OF ADVENTURE IN THE NATURE OF TRADE OR IS MERELY A TRANSACTION OF TRANSFER OF CAPITAL ASSET, SINCE DEPENDS ON APPRECIATION OF FACTS.... I HAVE FOUND THAT THE PRESENT CASE IS DISTINGUISHED FROM FACTS OF THE CASE DECIDED BY THE HONBLE RAJASTHAN HIGH COURT JUDGMENT. IN THE PRESENT CASE IT IS NOT ONLY THE MERE SALE AND PURCHASE OF LANDS. IT IS A SEQUENCE OF EVENTS SHOWING EXPLOITATION OF THE LAND PURCHASED, OVER A PERIOD OF TIME SHOWS THE INTENT AND MOTIVE OF ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 13 THE APPELLANT IN THE PRESENT CASE AS IS DISCUSSED IN DETAILS ABOVE BUT FOR THE SAKE OF CLARITY BEING REPEATED AGAIN. THE APPELLANT HAD PURCHASED THE LAND WHICH WAS AN AGRICULTURAL LAND IN THE YEAR 1996. THEN GOT IT CONVERTED IN THE YEAR 2003 TO RESORT AND BRANDED IT AS GEORGE RESORTS UTILIZING IT AND GIVING IT ON PAYMENTS FOR THE PURPOSES OF MARRIAGES AND OTHER SOCIAL GATHERING. AGAIN THEREAFTER, IN THE YEAR 2009, GOT THE LAND USE CONVERTED TO RESIDENTIAL. THE APPELLANT HAS NOT STOPPED AT THAT, IT HAS GOT APPROVAL TO DO PLOTTING ON THE PART OF THE LAND ADMEASURING 5386.50 SQ YARD OUT OF TOTAL LAND OF 12,060 SQ. YARD. THE APPELLANT HAS CARVED OUT 19 PLOTS AND START SELLING THOSE PLOTS AT A PREMIUM. THE AO HAS FURTHER BROUGHT ON RECORD THE FACT THAT THE APPELLANT HAS INSURED THE PLOTS AND DECLARE IT AS REAL ESTATE BUSINESS TO THE INSURANCE COMPANY. I HAVE ALSO NOTED THE FACT THAT ON THE SIMILAR GROUNDS FOR THE AY 2010-11, THE HONBLE ITAT, JAIPUR BENCH HAS NOT DECIDED THE CASE ON MERIT BUT DISMISSED IT ON TECHNICAL GROUND OF THE TAX DEMAND BEING LESS THAN RS. 10 LAKHS. IN VIEW OF THE ABOVE, IT IS MY CONSIDERED VIEW THAT THE AO IS JUSTIFIED IN TREATING THE INCOME FROM SALE OF 5 PLOTS DURING THE YEAR UNDER CONSIDERATION AS BUSINESS INCOME. ACCORDINGLY, THE CONTENTION OF THE AO IS SUSTAINED AND GROUND OF APPEAL NO. 1 IS DISMISSED. AS A CONSEQUENCE, GROUND OF APPEAL NO. 2 AND 3 ARE ALSO DISMISSED. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 14 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD AR HAS CONTENDED THAT THE ASSESSEE NEVER PURCHASED THE AGRICULTURAL LAND AS A TRADER. HE ACQUIRED THE LAND WITH INTENTION TO HOLD IT AND HAVE AGRICULTURAL INCOME BY CULTIVATION. THE AGRICULTURAL LAND WAS DECLARED IN THE RETURN UPTO AY 2005-06 WHICH IS ACCEPTED BY THE DEPARTMENT. THE ASSESSEE HAS NOT CARRIED OUT ANY DEALING IN THE REAL ESTATE IN EARLIER YEARS. HE ONLY CONVERTED THE LAND USE FROM AGRICULTURAL TO RESORT AND THEN TO RESIDENTIAL FOR BETTER UTILISATION AND THEREAFTER FOR EXPLOITATION OF HIS CAPITAL ASSET. FURTHER, RELIANCE WAS PLACED ON VARIOUS DECISIONS WHERE IT WAS HELD THAT PURCHASE OF LAND ONCE UPON A TIME AND THEREAFTER SELLING THE SAME IN PIECEMEAL AFTER DEVELOPMENT, THE PROFIT ARISING WOULD BE TAXED UNDER THE HEAD CAPITAL GAIN AND CANNOT BE TREATED AS ARISING OUT OF ADVENTURE IN THE NATURE OF TRADE AND BROUGHT TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. WE HAVE GONE THROUGH THESE CONTENTIONS AND DECISIONS WHICH HAVE BEEN CITED BY THE LD AR AT THE BAR AND WE ARE OF THE VIEW THAT THESE DECISIONS, RENDERED IN THE CONTEXT OF INDIVIDUAL FACTS AND CIRCUMSTANCES OF THE CASE, HAVE EITHER DECIDED A PARTICULAR TRANSACTION AS A DISPOSAL OF CAPITAL ASSET RENDERING IT TO BE BROUGHT TO TAX UNDER THE HEAD CAPITAL GAINS OR AS ADVENTURE IN THE NATURE OF TRADE RENDERING IT TO BE BROUGHT TO TAX AS A DISPOSAL OF STOCK- IN-TRADE UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS. 6. AT THE SAME TIME, THERE ARE SITUATIONS WHERE A CAPITAL ASSET, SUBSEQUENT TO INITIAL ACQUISITION, IS CONVERTED OR TREATED AS STOCK-IN- TRADE OF BUSINESS CARRIED ON BY THE ASSESSEE. IN SUCH CASES, THE INTENTION AT THE TIME OF PURCHASE OR ACQUISITION WOULD NOT BE OF MUCH ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 15 RELEVANCE. WHAT IS OF MORE RELEVANCE IS TO DETERMINE THE INTENTION AT THE SUBSEQUENT POINT IN TIME, THROUGH CONDUCT AND AFFIRMATIVE ACTIONS, THAT THE CAPITAL ASSET SO PURCHASED INITIALLY HAS BEEN CONVERTED OR TREATED AS STOCK-IN-TRADE OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE LEGISLATURE HAS SINCE ENVISAGED SUCH A SITUATION AND HAS BROUGHT ON THE STATUE, THE PROVISIONS OF SECTION 45(2) OF THE ACT BY VIRTUE OF THE TAXATION LAWS (AMENDMENT) ACT, 1984 W.E.F 1.4.1985 AND THERE IS NOW A STATUTORY RECOGNITION THAT EVEN ASSET INITIALLY ACQUIRED AS INVESTMENT CAN BE SUBSEQUENTLY CONVERTED INTO STOCK-IN-TRADE. APPARENTLY, NONE OF THE DECISIONS CITED AT THE BAR CONSIDERS THE IMPACT OF THE PROVISIONS OF SECTION 45(2) OF THE ACT, WHICH TO OUR MIND, MAKE THOSE DECISIONS DISTINGUISHABLE. SIMILARLY, THE DECISION OF THE LD CIT(A) FOR AY 2010-11 IS DISTINGUISHABLE AS THE SAME HAS ALSO NOT CONSIDERED THE IMPACT OF SECTION 45(2) OF THE ACT. 7. AS PER SECTION 45(2) OF THE ACT, PROFITS & 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 BUSINESS CARRIED ON BY HIM, SHALL BE CHARGEABLE TO TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK IN TRADE IS SOLD OR OTHERWISE TRANSFERRED AND FOR THE PURPOSE OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION SHALL BE DEEMED TO BE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF CAPITAL ASSET. THEREFORE, FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION AS REDUCED BY THE COST OF ACQUISITION IS REQUIRED TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN. FURTHER, SALES REALIZATION OF THE STOCK-IN-TRADE OVER SUCH FAIR MARKET VALUE IS REQUIRED TO BE ASSESSED AS BUSINESS INCOME. ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 16 8. IN THIS REGARD, REFERENCE CAN BE DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF OCTAVIUS STEEL & CO LTD VS ACIT [2002] 83 ITD 87 (CAL)(SB) WHEREIN IT WAS HELD AS UNDER: ON A PLAIN READING OF THE AFORESAID SECTION 45(2) IT IS CLEAR THAT THIS PROVISION WAS ENACTED FOR COMPUTING CAPITAL GAINS IN RESPECT OF TRANSFER OF CONVERTED ASSET INTO STOCK-IN-TRADE OF A BUSINESS. IT HAS BEEN PROVIDED THEREIN THAT SUCH PROFIT ARISING FROM THE TRANSFER BY WAY OF CONVERSION AS STOCK-IN- TRADE SHALL BE CHARGEABLE TO INCOME-TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED. SECTION 45(2) STARTS WITH A NON OBSTANTE CLAUSE. THEREFORE, THE PROVISION OF SECTION 45(2) SUPERSEDES ALL THE OTHER PROVISIONS. UNDER SUB-SECTION (2) OF SECTION 45, IT IS CLEAR THAT CAPITAL GAIN SHALL BE CHARGED IN THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE, WHICH IS KNOWN TO BE SO ONLY AFTER CONVERSION, IS SOLD OR OTHERWISE TRANSFERRED. ADMITTEDLY, THE TRANSFER OF STOCK-IN-TRADE IN THE PRESENT CASE WAS EFFECTED BY WAY OF REGISTERED DEED OF CONVEYANCE DURING THE PRESENT ASSESSMENT YEAR. THEREFORE, THE FIRST APPELLATE AUTHORITY WAS JUSTIFIED IN HOLDING THAT CAPITAL GAIN WAS TO BE COMPUTED IN THE PREVIOUS YEAR EVEN THOUGH THAT CONVERSION WAS EFFECTED BEFORE 1-4-1985. THIS SUB-SECTION SUPERSEDES PROVISION OF SUB-SECTION (1) AND PROVIDES FOR CHARGING OF CAPITAL GAIN IN THE YEAR WHEN THE CONVERTED STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED. FOR THE PURPOSE OF SECTION 48 ALSO THIS SECTION HAS PROVIDED THE METHOD FOR COMPUTING CAPITAL GAIN IN SUCH CIRCUMSTANCES, I.E., THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER OF CAPITAL ASSET. THERE IS NO AMBIGUITY FOUND IN THE SAID PROVISION. UNDER SECTION 2(47)(IV ), WHICH PROVISION ALSO CAME INTO EFFECT FROM 1-4-1985, WHEN AN ASSET IS CONVERTED BY THE OWNER AS STOCK-IN-TRADE OF BUSINESS, SUCH CONVERSION IS TO BE TREATED AS TRANSFER. CORRESPONDING AMENDMENT WAS MADE IN SECTION 45 FOR COMPUTING CAPITAL GAIN ARISING OUT OF SUCH TRANSFER. IN THE PRESENT CASE THE ASSET WAS CONVERTED INTO STOCK-IN-TRADE BEFORE 1-4- 1985. EVEN ASSUMING THAT BEFORE 1-4-1985 SUCH CONVERSION COULD NOT BE SAID TO BE TRANSFER WITHIN THE MEANING OF SECTION 2(47 )(IV) BUT ADMITTEDLY, AFTER 1- 4-1985, THE EXTENDED MEANING OF THE WORD TRANSFER WAS APPLICABLE IN RESPECT OF SUCH CONVERSION. HOWEVER, CAPITAL GAIN COULD NOT BE COMPUTED UNLESS SUCH STOCK-IN-TRADE WAS SOLD OR OTHERWISE TRANSFERRED. THE GAIN AROSE ONLY ON SALE OR TRANSFER OTHERWISE. IT DID NOT AMOUNT TO GIVING RETROSPECTIVE EFFECT TO THE ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 17 STATUTES BUT APPLYING THE LAW APPLICABLE ON THE DATE OF TAXABLE EVENT, I.E., SALE OF CONVERTED ASSETS. THE CBDT CIRCULAR NO. 397, DATED 16-10-1984 CLARIFIES THAT CAPITAL GAIN IN CASES OF CONVERTED ASSETS IN CLOSING STOCK WOULD BE CHARGEABLE IN THE YEAR WHEN SUCH CONVERTED ASSET IS ACTUALLY SOLD AS STOCK-IN-TRADE; IN OTHER WORDS, NOT IN THE YEAR OF CONVERSION, BUT THE YEAR OF ACTUAL SALE. IN THE TWO CASES BEFORE THE SUPREME COURT, THE DECISION WAS THAT ON CONVERSION THERE IS NO PROFIT AS NO ONE CAN MAKE PROFIT OUT OF HIMSELF. THAT SITUATION IS NOW TAKEN CARE OF BY INTRODUCING SECTION 45(2). IT PROVIDES FOR TAXATION WHERE THE CONVERTED STOCK-IN-TRADE IS SOLD AND THE DIFFERENCE BETWEEN THE MARKET VALUE ON THE DATE OF CONVERSION AND ACTUAL COST IS THE CAPITAL GAIN. THAT WAS WHAT HAD BEEN ASSESSED BY THE ASSESSING OFFICER. ACCORDINGLY, THE ORDER OF THE FIRST APPELLATE AUTHORITY WAS TO BE UPHELD. 9. IN THIS REGARD, REFERENCE CAN ALSO BE DRAWN TO THE DECISION OF THE CORDINATE BENCH OF THE TRIBUNAL IN CASE OF JEHANGIR T. NAGREE VS ACIT [2008] 23 SOT 512 (MUM) WHEREIN IT WAS HELD AS UNDER: .FROM A CAREFUL PERUSAL OF THE RELEVANT PROVISIONS OF SECTION 45(2) OF THE ACT, WE FIND THAT THERE SHOULD BE THE CONVERSION OF INVESTMENT OR CAPITAL ASSET BY THE OWNER AS STOCK IN TRADE OF A BUSINESS CARRIED ON BY HIM. THE WORDS 'BUSINESS CARRIED ON BY THE ASSESSEE' DOES NOT MEAN THAT BEFORE CONVERSION OF INVESTMENT OR CAPITAL ASSET IN STOCK IN TRADE THE BUSINESS MUST BE IN EXISTENCE. IF THE ASSESSEE STARTS THE BUSINESS BY CONVERTING THE INVESTMENT INTO STOCK IN TRADE INSTEAD OF PURCHASING IT FROM THE MARKET CAN IT NOT BE CALLED THAT THE ASSESSEE IS IN THE BUSINESS OF TRADING IN SHARES ENABLING THE ASSESSEE TO AVAIL THE BENEFIT OF SECTION 45(2) OF THE ACT. TO OUR MIND THE RESTRICTIVE MEANING AS SUGGESTED BY THE REVENUE SHOULD NOT BE GIVEN TO THE WORDS 'BUSINESS CARRIED ON BY HIM' IN THE LIGHT OF THE USE OF THE WORDS IN OTHER SECTIONS OF THE ACT LIKE SECTION 28(I). MOREOVER, IN THE INSTANT CASE, THE ASSESSEE WAS ALREADY IN THE BUSINESS OF MANUFACTURE AND SALE OF FURNITURE AND SECTION 45(2) DOES NOT STATE THAT THE INVESTMENT CAN ONLY BE CONVERTED IN A STOCK IN TRADE OF THE BUSINESS OF TRADING IN SHARES. THE ASSESSEE CAN UNDERTAKE MULTIPLE BUSINESS ACTIVITIES UNDER HIS PROPRIETARY CONCERN. BESIDES, THE MANUFACTURING AND SALE OF FURNITURE, THE ASSESSEE CAN ALSO DEAL IN TRADING IN SHARES IN THE NAME OF SAME PROPRIETARY CONCERN KEEPING THE STOCK IN TRADE OF SHARES SEPARATE. FROM ANY ANGLE, IF THE FACTS OF THE CASE ARE VIEWED, WE WOULD FIND THAT THE CONVERSION OF INVESTMENT IN SHARES AND SECURITIES IN STOCK ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 18 IN TRADE IS VALID AND THE ASSESSEE IS ENTITLED TO BENEFIT OF SECTION 45(2) OF THE ACT IN THE LIGHT OF HUGE VOLUME OF TRANSACTIONS IN SHARES. 10. IN THIS REGARD, REFERENCE CAN ALSO BE DRAWN TO THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN CASE OF RAJENDRA KUMAR DWIVEDI [2012] 26 TAXMANN.COM 84 (ALL) WHEREIN THE FACTS OF THE CASE ARE SIMILAR TO THAT OF THE CASE AND IT WAS HELD AS UNDER: ON THE TESTS LAID DOWN BY THE SUPREME COURT AND THIS COURT, WE FIND THAT THE INCOME TAX AUTHORITIES DID NOT COMMIT ANY ERROR OF LAW. THEY HAVE APPLIED THE CORRECT PRINCIPLES OF LAW AND HAVE RIGHTLY ARRIVED AT THE FINDING THAT THE LAND IN URBAN AREA FOR WHICH THE ZAMINDARI WAS ABOLISHED ON 1.7.1961 WAS PARTLY INHERITED BY THE ASSESSEE FROM HIS FATHER. THE REMAINING PART WAS PURCHASED BY HIM BY SALE DEEDS DATED 16.12.1958 AND 16.5.1959. THE ASSESSEE ALONG WITH HIS CO-PARTNERS HAD FILED SUIT FOR DECLARATION, WHICH WAS DECREED ON 5.6.1968. THE SONS OF SHRI NARAIN RAO SAPRE HAD FILED SUITS FOR CANCELLATION OF SALE DEEDS AND FOR POSSESSION. THE SUIT WAS DECREED CANCELLING THE SALE DEED TO THE EXTENT OF 2/3RD SHARE BUT CLAIM FOR POSSESSION WAS NOT ALLOWED. IN THE CIRCUMSTANCES, THE STAND TAKEN BY THE ASSESSEE THAT THE PROPERTY WAS INHERITED AS H.U.F., WAS RIGHTLY DISBELIEVED. THE ASSESSEE WAS AN EMPLOYEE OF NAGAR PALIKA PARISHAD, JALAUN AT ORAI. HE HELD THE LAND IN URBAN AREA AS CAPITAL ASSET AND STARTED SELLING IT IN PIECES OF 43 SALE DEEDS BETWEEN JANUARY, 1984 TO MARCH, 1991 IN PLOTS RANGING FROM 60 SQ. MTRS. TO 1815 SQ. MTRS. SINCE NO AGRICULTURAL OPERATIONS WERE CARRIED ON, THE INCOME TAX AUTHORITIES RIGHTLY CONCLUDED THAT THE CAPITAL ASSET WAS CONVERTED INTO STOCK-IN-TRADE, AND THAT SALES OF PLOTS IN THE CASE OF SUCH LAND WOULD BE TREATED TO BE BUSINESS ACTIVITY TO MAKE PROFITS. 26. THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO RECORDED THE FINDINGS THAT THE ASSESSEE HAD EVENED OUT THE LAND WITH THE HELP OF TRACTOR AND HAD SOLD THE PLOT AFTER LEAVING THE ROADS AND DRAINAGE SYSTEM AND THUS IN VIEW OF THE PROVISIONS OF SECTION 45 (2) OF THE ACT THE PROFITS AND GAINS ARISING OUT OF TRANSFER BY WAY OF CONVERSION BY THE OWNER OF CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF BUSINESS CARRIED ON BY HIM IS FOR AND FROM THE ASSESSMENT YEAR 1985-86 BE CHARGED TO TAX UNDER THE HEAD CAPITAL GAINS IN THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM. THE PROPERTY SHALL BE DEEMED TO HAVE BEEN TRANSFERRED IN THE YEAR IN WHICH IT WAS CONVERTED INTO STOCK-IN-TRADE. THE PROVISION OF SECTION 45 (2) PROVIDING FOR CAPITAL GAINS TAKES CARE OF THE FACTS, WHERE THE ASSESSEE DOES NOT TRANSFER CAPITAL ASSETS INTO STOCK-IN-TRADE, BUT THE ASSET IS TREATED AS STOCK-IN-TRADE. SECTION 45(2) PROVIDES AS FOLLOWS:- ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 19 '45(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 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 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 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.' 27. WE DO NOT FIND THAT THE INCOME TAX AUTHORITIES AND THE TRIBUNAL COMMITTED ANY ERROR IN APPLYING SECTION 45 (2) OF THE ACT FOR THE PURPOSES OF ASSESSMENT FOR THE RELEVANT ASSESSMENT YEARS, AND BY ADOPTING A NOTIONAL VALUE FOR THE PURPOSES OF FIXING THE PRICE FOR LAND FOR STAMP DUTY FOR WORKING OUT BUSINESS INCOME FROM THE SALE OF LAND. THEY CORRECTLY ADOPTED A METHOD, WHICH WAS FAIR AND REASONABLE IN ARRIVING AT A VALUE OF LAND AS ON 1.4.1974 TO BE NOTIONAL COST OF ACQUISITION AND APPLYING THE DEPRECIATED VALUE BY 10% OF EVERY YEAR FOR THE PURPOSES OF ARRIVING AT VALUE IN THE YEAR 1984. 11. IN THIS REGARD, REFERENCE CAN ALSO BE DRAWN TO THE DECISION OF THE HONBLE MADRAS HIGH COURT IN CASE OF CIT VS ESSORPE HOLDINGS (P) LTD [2017] 83 TAXMANN.COM 280 (MAD) WHEREIN IT WAS HELD AS UNDER: 21. A PART OF THE LAND MEASURING 5.075 ACRES, OUT OF THE TOTAL EXTENT OF 10.150 ACRES, WERE SOLD EVEN BEFORE FILING THE DEMERGER APPLICATION BEFORE THIS COURT. THE AFORESAID SALE WAS NOT BROUGHT TO THE NOTICE OF THE HIGH COURT. THE HIGH COURT OF MADRAS, AS PER THE SCHEME OF DEMERGER APPROVED EML DEMERGING WITH M/S. EHPL, TRANSFERRING THE REAL ESTATE DIVISION OF EML TO EHPL AS A GOING CONCERN. AS ON 31.03.2010, THE ASSESSEE COMPANY HAS SHOWN THE LAND IN QUESTION AS STOCK IN TRADE AND THE SAME WAS LATER CONVERTED AS FIXED ASSET, BY THE BOARD RESOLUTION. IN THE CASE OF SALE OF 50% OF THE SAME PROPERTY, OUT OF 10.150 ACRES OF LAND, FOR THE ASSESSMENT YEAR 2009-10 WAS CONSIDERED, BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ESSORPE MILLS LTD. (SUPRA), WHEREIN IT WAS HELD THAT THE GAIN ON TRANSFER OF PROPERTY UP TO THE DATE OF CONVERSION INTO STOCK- IN-TRADE HAS TO BE ASSESSED UNDER THE HEAD 'CAPITAL GAINS' AND THE GAIN IN RESPECT OF PROPERTY I.E. AFTER THE DATE OF CONVERSION INTO STOCK-IN-TRADE HAS TO BE ASSESSED AS BUSINESS INCOME. AS THE ASSESSING OFFICER COMPUTED THE ENTIRE SALE CONSIDERATION UNDER THE HEAD LONG TERM CAPITAL GAINS, HE DID NOT APPLY THE PROVISIONS OF SECTION 45(2) OF THE ACT. THEREFORE, THE ASSESSING OFFICER SHOULD COMPUTE THE BUSINESS INCOME IN RESPECT OF STOCK-IN-TRADE OF THE PROPERTY, TAKING INTO ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 20 CONSIDERATION THE PROVISIONS OF SECTION 45(2) OF THE ACT, IN ACCORDANCE WITH LAW, AFTER GIVING ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. 22. THE PROVISIONS OF SECTION 45(2) IS A CHARGING SECTION FOR CAPITAL GAINS. IT WILL APPLY, WHENEVER A LAND, WHICH ORIGINALLY WAS TREATED AS INVESTMENT AND LATER CONVERTED INTO A STOCK IN TRADE, IS SOLD OR TRANSFERRED. SO THE LAND IN THIS CASE WAS CONVERTED INTO A STOCK IN TRADE IN THE HANDS OF EML AND AS DEMERGER IS NOT A TRANSFER, THE CAPITAL GAINS UNDER THAT SECTION IS CHARGED WHEN THE LAND WAS SOLD BY THE ASSESSEE COMPANY. THE CAPITAL GAINS ACCRUING ON CONVERSION OF THE LAND IN STOCK IN TRADE CAN BE DETERMINED IN THE HANDS OF EML AND THE COMPUTATION CANNOT BE QUESTIONED BY THE DEPARTMENT. LEVY OF TAX IS POSTPONED AT THE TIME OF ACTUAL TRANSFER OR SALE. UNDER SECTION 45(2) OF THE ACT, THE SECTION CHARGES TO CAPITAL GAINS CONVERSION OF INVESTMENT, INTO STOCK IN TRADE BUT POSTPONES THE CHARGE OF TAX TO THE TIME, SUCH STOCK IN TRADE IS SOLD OR TRANSFERRED. ONCE CONVERTED INTO STOCK IN TRADE, THE ASSET WILL CONTINUE TO BE TREATED AS STOCK IN TRADE, AS MENTIONED IN THE SECTION ITSELF. APPLICATION OF PROVISIONS OF SECTION 45(2) WILL NOT RECONVERT THE CONVERTED STOCK IN TRADE BACK INTO AN INVESTMENT. CONSIDERATION OF SALE OF SUCH CONVERTED ASSET WILL ALWAYS BE ASSESSED AS PROFITS OF BUSINESS. THE SAID PROVISION WAS INTERPRETED BY THE ASSESSING OFFICER UNDER THE SAID SECTION. 23. FOLLOWING THE DECISION OF THIS COURT, IN THE CASE OF AMBADI ENTERPRISES LTD. (SUPRA), WHEREIN IT IS HELD AS FOLLOWS: 'THE TRIBUNAL HAS ALSO FOUND THAT THE LAND HAD NOT BEEN DEVELOPED EARLIER AND THAT THE INVESTMENT MADE BY THE ASSESSEE IN THE YEAR 1968 WAS ONLY BY WAY OF INVESTMENT AND NOT TO TREAT THE LANDS AS ITS STOCK-IN-TRADE. THE MONEY REQUIRED FOR THE PURCHASE OF THE LAND HAD COME OUT OF THE FUNDS WHICH HAD BEEN LENT TO IT BY A SISTER COMPANY AS LOAN OR DEPOSIT. INSTEAD OF KEEPING THE MONEY AS DEPOSIT OR BY LENDING THE MONEY TO OTHERS, IT HAD CHOSEN TO INVEST THAT MONEY ON LAND, AND HOLDING THE LAND AS AN INVESTMENT. IT WAS ONLY IN THE YEAR 1972, THE COMPANY DECIDED TO TREAT THE SAME AS ITS STOCK-IN-TRADE, DEVELOPED THE SAME AND AFTER EFFECTING SUCH DEVELOPMENT, THE LAND WAS SOLD IN SMALL PARCELS ON A PROFIT. THE TRIBUNAL HAS ALSO OBSERVED IN ITS ORDER THAT LANDS AS IN THE YEAR 1972 COULD BE HELD EITHER AS AN INVESTMENT OR STOCK-IN-TRADE AND THAT THE ASSESSEE HAD HELD IT AS INVESTMENT TILL JULY 6, 1972, AND IT IS ONLY THEREAFTER THAT IT HAD TREATED THE LAND AS ITS STOCK-IN-TRADE. THE TRIBUNAL'S VIEW THAT FOR FINDING OUT THE BUSINESS PROFIT FOR THE SALE OF LANDS, THE MARKET VALUE ON THE DATE OF CONVERSION OF THE ASSET FROM INVESTMENT TO BUSINESS ASSET SHOULD BE TAKEN AND NOT THE ORIGINAL PRICE FOR WHICH THE ASSESSEE PURCHASED THE PROPERTY IS SUSTAINABLE IN LAW.' ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 21 THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GROZ-BECKERT SABOO LTD. (SUPRA), WHEREIN AN ASSESSEE CONVERTS HIS CAPITAL ASSETS INTO STOCK-IN- TRADE AND STARTS DEALING IN THEM, THE TAXABLE PROFIT ON THE SALE MUST BE DETERMINED BY DEDUCTING FROM THE SALE PROCEEDS THE MARKET VALUE AT THE DATE OF THEIR CONVERSION INTO STOCK-IN-TRADE AND NOT THE ORIGINAL COST OF THE ASSESSEE. IN PARAGRAPH 2, IT HAS BEEN HELD AS FOLLOWS : '2 .. THERE CAN, THEREFORE, BE NO DOUBT THAT THESE RAW MATERIALS AND SEMI-FINISHED NEEDLES WERE RECEIVED BY THE ASSESSEE AS CAPITAL ASSETS AND SUBSEQUENTLY ON 30TH SEPT., 1961, THEY WERE TRANSFERRED TO THE BUSINESS AS PART OF ITS STOCK. IF THAT BE SO, THE COST OF THESE RAW MATERIALS AND SEMI-FINISHED NEEDLES TO THE BUSINESS COULD NOT BE SAID TO BE NIL, BUT, ON THE PRINCIPLE LAID DOWN BY THIS COURT IN CIT VS. BAI SHIRINBAI K. KOOKA (1962) 46 ITR 86 (SC) : TC14R.129, AND SUBSEQUENTLY FOLLOWED IN CIT VS. HANTAPARA TEA CO. LTD. (1973) 89 ITR 258 (SC) : TC17R.1227, IT WOULD BE THE MARKET VALUE OF THESE RAW MATERIALS AND SEMI-FINISHED NEEDLES AS ON 30TH SEPT., 1961. IT IS NOW WELL SETTLED BY THESE DECISIONS THAT WHERE AN ASSESSEE CONVERTS HIS CAPITAL ASSETS INTO STOCK- IN-TRADE AND STARTS DEALING IN THEM, THE TAXABLE PROFIT ON THE SALE MUST BE DETERMINED BY DEDUCTING FROM THE SALE PROCEEDS THE MARKET VALUE AT THE DATE OF THEIR CONVERSION INTO STOCK-IN-TRADE (SINCE THIS WOULD BE THE COST TO THE BUSINESS) AND NOT THE ORIGINAL COST TO THE ASSESSEE ..' 24. THEREFORE, IN THE LIGHT OF THE DECISIONS RENDERED BY THIS COURT AS WELL AS THE HON'BLE SUPREME COURT AND THE ORDERS PASSED BY THE COORDINATE BENCH OF THE INCOME TAX APPELLATE TRIBUNAL, IN THE CASE OF ESSORPE MILLS LTD. (SUPRA) WHEREIN THE REVENUE HAS ACCEPTED THE SALE OF 50% OF THE SAME PROPERTY BY THE ESSORPE HOLDINGS PVT. LTD., TO AN EXTENT OF 5.075 ACRES OF LAND FOR THE ASSESSMENT YEAR 2009-10, DIRECTING THE ASSESSING OFFICER TO APPLY THE PROVISIONS OF SECTION 45(2) OF THE ACT AND COMPUTE THE CAPITAL GAINS UPTO TO THE DATE OF CONVERSION INTO STOCK IN TRADE, AND THEREAFTER ON ACTUAL SALE OF THE LAND I.E. THE DIFFERENCE BETWEEN THE VALUE OF SALE AND STOCK IN TRADE TO BE CONSIDERED AS ' BUSINESS INCOME'. 12. APPLYING THE RATIO LAID DOWN IN THE ABOVE CITED DECISIONS, IN THE INSTANT CASE, WE FIND THAT THE AGRICULTURAL LAND INITIALLY PURCHASED IN YEAR 1996 WAS CONVERTED AND THE LAND USE CHANGED TO RESORT PURPOSES IN YEAR 2002 AND NECESSARY APPROVAL SOUGHT FROM NAGAR VIKAS NIYAS, ALWAR. THEREAFTER, THE SAID RESORT LAND WAS USED FOR MARRIAGE AND SOCIAL FUNCTIONS UNDER THE NAME OF GEORGIA RESORTS. IN YEAR 2009, THE ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 22 ASSESSEE AGAIN GOT THE LAND USE CHANGED FROM RESORT TO RESIDENTIAL AND NECESSARY APPROVAL SOUGHT FROM NAGAR VIKAS NIYAS, ALWAR WHICH VIDE ITS ORDER DATED 31.7.2009 HAS APPROVED THE CHANGE OF THE LAND USE TO RESIDENTIAL. THEREAFTER, THE ASSESSEE HAD TAKEN A SERIES OF STEPS WHEREBY HE HAS GOT THE PLANS APPROVED FOR CARVING OUT 20 PLOTS OF LAND, CARRIED OUT VARIOUS DEVELOPMENT ACTIVITIES AND SOLD THE RESIDENTIAL PLOTS TO INDIVIDUAL PURCHASERS OVER A PERIOD OF TIME. DURING AY 2010-11, AS PER ADMITTED POSITION BY THE ASSESSEE, HE SOLD 3 PLOTS OF LAND. THEREAFTER, DURING AY 2011-12, HE SOLD 1 PLOT OF LAND AND IN THE YEAR UNDER CONSIDERATION, HE SOLD 5 PLOTS OF LAND FOR A CONSIDERATION OF RS 97,16,600 AND SALE DEEDS DULY EXECUTED AND ASSESSED BY STAMP VALUATION AUTHORITIES. ALL THESE FACTS TAKEN TOGETHER SHOWS CLEARLY THAT THE ASSESSEE HAS TAKEN AFFIRMATIVE STEPS AND ACTIONS WHERE HE HAS GOT THE LAND USE CHANGED TO RESIDENTIAL AND CONVERTED HIS RESORT LAND INTO RESIDENTIAL STOCK-IN-TRADE OF HIS BUSINESS OF SELLING THE PLOTS OF LAND FOR EARNING PROFIT. THE VERY NATURE AND PURPOSE OF THE RESORT LAND HAS BEEN CHANGED AND SUCH CHANGE IS AN IRREVERSIBLE CHANGE WHERE VERY NATURE AND PURPOSE OF THE LAND HAS BEEN CHANGED FROM RESORT TO RESIDENTIAL. IT IS NOT A CASE THAT THE BUYERS HAVE ACQUIRED RESORT PLOTS AND SUBSEQUENTLY CHANGED IT TO RESIDENTIAL USE. IN THIS CASE, THE ASSESSEE ITSELF HAS SOUGHT LAND USE CONVERSION AND DEVELOPED RESIDENTIAL PLOTS AND THEN SOLD IT TO INDIVIDUAL BUYERS AS RESIDENTIAL PLOTS. THEREFORE, WE ARE OF THE VIEW THAT BY SUCH PLOTTING OF LAND, THE RESORT LAND HAS BEEN CONVERTED INTO STOCK-IN-TRADE (IN FORM OF RESIDENTIAL PLOTS) OF ASSESSEES BUSINESS. THE DEVELOPMENT OF RESIDENTIAL PLOTS AND SAID CONVERSION HAS HAPPENED BY ASSESSEES OWN ADMISSION DURING FINANCIAL YEAR 2009-10 AND THE INTENT OF THE ASSESSEE HAS THUS BEEN DEMONSTRATED THROUGH HIS ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 23 OWN DEEDS AND ACTIONS. THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION AS REDUCED BY THE COST OF ACQUISITION AND IMPROVEMENT/DEVELOPMENT EXPENSES AS CLAIMED TO HAVE BEEN INCURRED, IS REQUIRED TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN IN THE YEAR(S) THE STOCK-IN-TRADE IS SOLD/TRANSFERRED. FURTHER, SALES REALIZATION OF THE STOCK-IN-TRADE OVER SUCH FAIR MARKET VALUE IS REQUIRED TO BE ASSESSED AS BUSINESS INCOME. DURING THE YEAR UNDER CONSIDERATION, IT IS AN ADMITTED POSITION THAT 5 PLOTS HAVE BEEN SOLD FOR A CONSIDERATION OF RS 97,16,600. THEREFORE, THE TAXABILITY ARISING ON CONVERSION OF RESORT LAND INTO STOCK-IN-TRADE TO THE EXTENT THE LATTER HAS BEEN SOLD DURING THE YEAR, ARISES DURING THE IMPUNGED ASSESSMENT YEAR. THE MATTER IS ACCORDINGLY SET-ASIDE TO THE FILE OF THE AO TO DETERMINE THE CAPITAL GAINS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 45(2) AS WELL AS BUSINESS INCOME ON SALE OF SUCH PLOTS. FURTHER, THE MATTER RELATING TO ALLOWABILITY OF DEVELOPMENT EXPENSES AND CLAIM OF DEDUCTION U/S 54 IS ALSO SET ASIDE TO THE FILE OF THE AO WHO SHALL EXAMINE THE SAME AND ALLOW AS PER LAW. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27/02/2018. SD/- SD/- FOT; IKWY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 27/02/2018 * GANESH KR. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: ITA NO. 930/JP/2016 PRADEEP VATRANA, ALWAR VS. DCIT, ALWAR 24 1. VIHYKFKHZ@ THE APPELLANT- SHRI PRADEEP VATRANA, ALWAR 2. IZR;FKHZ@ THE RESPONDENT- DCIT, CIRCLE-2, ALWAR 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE { ITA NO. 930/JP/2016} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR