INCOME TAX OFFICER, WARD-11(1), DELHI vs. HKT CORPORATION PVT LTD, DELHI

This Revenue’s appeal raises the following substantive grounds: “1.Whether on the facts and circumstance of the case, the L.d. CIT(A) has erred in treating the immovable property situated at 1E/20, Jhandewalan Extn., Delhi as capital asset on the date of sale in FY 2019-20 whereas such property was initially accounted as Stock-in- Trade in the FY 2010-112 2. Whether on the facts and circumstance of the case. the Ld. CIT(A) has erred in accepting the board resolution dated 04/04/2016 as sufficient document to allow conversion of stock-in-trade to capital asset but ignored the fact that main business of the assessee is development of property? 3. Whether on the facts and circumstance of the case, the Ld. CIT(A) has erred in allowing expenses incurred in FY 2011-12, 2017-18 & 2018-19 against consideration received from property whereas same were incurred in prior period? 4. Whether on the facts of the case, the CIT(A) has ignored the fact that land converted into capital asset was to avoid taxes and there was no change in nature of business of assessee. 5. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.” 3. Both the parties next invite our attention to the CIT(A)/NFAC’s detailed discussion reversing the assessment findings inter alia treating the assessee’s capital gains/loss; as the case may be, as in the nature of business income in assessment order dated 19.09.2022; reading as under: “7. 7. DECISION: I have duly perused the Order of AO, submission of the appellant and other available material on record.

1. In this case, appellant had filed its ROI with gross total income of Rs. 1,79,25,600/- under which it has shown loss of Rs. (- )1,53,75,791/- under the head income from business. Further, appellant has shown short term capital loss of Rs. (-)1,69,14,140/- by way of selling property at DLF Gurgaon. In its ROI, appellant has also shown LTCG of Rs. 4,95,89,657/- by way of sale of property being Plot No. 20 Jhandewalan Extension, New Delhi.

2. Ground no. 2: 3 | P a g e

That on facts and in the circumstances of the case and in law, the Assessment Unit has erred in law and on facts in rejecting claim of transfer expenses of Rs.23,40,000/-in regard to Capital Gains on sale of property at Rs. 3.9 crores on 12.03.2020. The invoices and bank details of payments and TDS deducted and paid furnished by the appellant has not been examined.

3. Ground nos. 1, 3, 3(i) and 4:

That on facts and in the circumstances of the case and in law, the Assessment Unit has erred in law and on facts in re- computing income from sale of property on 14.05.2019 for Rs. 10,11,00,000/- as business Income. The fact that the property was shown in FY 2010-11 as Inventory and In FMA 2016-17 it was duly transferred to Investment, has been ignored by the learned assessing officer and the assessment has been made as Business income holding the investment in property as stock inventory on sale of inventory as against Capital gains shown by the appellant, which was erroneous and bad in law.

That the learned AO has also erred in law and on facts in disallowing short term capital loss of Rs. 1,45,74,040/- which was set off against long term Capital Gain. Above grounds being related to same issue and in consequence thereof; are being adjudicated collectively.

3.1 In respect of LTCG shown by the appellant regarding the property at Jhandewalan Extension, New Delhi, AO treated the transaction as business income instead of capital gains. This property was sold by the appellant on 14th May, 2019. This property was purchased in FY 2010-11 and was shown as inventory in the balance sheet of appellant. Explanation of the appellant that, this property shown as inventory in FY 2010-11 in the balance sheet of the appellant was converted into capital asset in FY 2016-17 was not accepted by the AO as mentioned in page 5 of AO's Order at point no. 1 and thus, this transaction was treated as business income instead of capital gains by the AO.

3.2 From the records and from reply submitted by appellant to AO during scrutiny proceedings in response to show cause notice, it is seen that the appellant purchased the property situated a, IE/20 Jhandewalan during the FY 2010-11 for Rs. 2,04,86,480/- and the 5 | P a g e same was shown as inventory in the accounts. During the financial year 2016-17, the appellant company transferred such property from inventory to investment. The conversion of inventory to investment was approved by board of directors vide board resolution dated 04 April 2016, copy of the said board resolution is placed at page no. 41 of paper book. This fact of conversion/reclassification was also mentioned in the audit report the extract of the financial statement showing reclassification of this property is given as under:

3.3 In view of above legal position and facts that it's clear that this property ceased to exist as stock-in-trade w.e.f 01.04.2017, hence such property became the Capital Assets of the appellant.At the time of sale of property, such property was in the nature of capital assets and the same is evident from the note no. 10 of audited financial statement for the year ended 31st March 2019 as can be seen from Copy of audited financial statement is enclosed at page no. 42 to 62 6 | P a g e of paper book. These facts along with explanation were put forth before AO by appellant during assessment proceedings vide reply submitted in response to show cause notice issued by AO. However, AO has not specifically commented on these facts while treating the transaction as business income,

3.4 Further, as per the provision of section 45 of the Act, any profit or gain arising from transfer of Capital Assets is chargeable to Income Tax under the head "Capital Gain". The provisions of Section 45(2) of the I.T. Act, deals with the issue of capital gain where the investment is converted into stock in trade. According to this section, 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 tax as the income from the previous year in which such stock in trade is sold or otherwise transferred by him, and for the purpose of Section 48. 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 transfer of the capital asset.

3.5 While incorporation the Sub Section 2 to Section 45, the legislature has not visualized the situations in other way round, where, the stock in trade is to be converted into the investments and later on the investment was sold on profit. Hence for the period before amendment; in the absence of a specific provision to deal with this type of situations; such transaction cannot be treated as business transaction when on the date of sale of such asset; it was capital asset.

3.6 Considering the aforesaid facts and provision of section 2(14) and 45 of the Act, any profit on transfer of such property is chargeable under head capital gains and the appellant has disclosed and offered for tax such gain under the head Capital gains. The appellant converted his property being property at 1E/20, Jhandewalan during F.Y.16-17 i.e. A.Y.17-18 from stock-in-trade to capital asset. The AO has ignored this fact that change in law had come into w.e.f. FY 18- 19 and the sale took place in AY under question. The action of the AO is contrary to the established position of law. Section 28 was amended by Finance Act 2018 to include clause (via) to provide that the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner will be treated as "Income" under the head "Profits and gains of business or profession. The conversion was permissible in law and the AO is wrong in denying the appellant's claim of capital gains. 7 | P a g e

3.8 Further, the incidence of levy under Section 45 is on the capital gains to be computed in the manner provided for in Section 48 read with Section 55(2) of the Act. The deduction permissible under Section 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable under Section 45 are the "profits or gains arising from the transfer of a capital asset" and the charge of income- tax on the capital gains is on income of the previous year in which the transfer took place. The only condition which must be satisfied in order to attract the charge to tax under Section 45 is that the property transferred must be a capital asset on the date of transfer and that it is not necessary that it should have been capital asset also on the date of its acquisition by the assessee.

3.9 For these views, I place reliance on following judgement of Hon'ble Courts.

The property held by the assessee became a capital asset as per the notification issued on 6.1.1994. But as per Section 55(2)(b), the cost of any improvement in relation to a capital asset means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after 1st April, 1981 by the previous owner or the assessee. Admittedly, the asset which was declared as capital asset by notification became the asset of the assessee long prior to 1st 9 | P a g e

3.10 In view of above mentioned factual and legal position, decisions of above mentioned relied upon case laws and explanation along with documentary supporting given by appellant during scrutiny proceedings; I direct the AO to treat the asset in question as capital asset at the time of sale of the same, treat the transaction as capital gains, allow indexation of purchase cost from date of acquisition of the asset and allow set off of income/loss under same or other heads and carry forward of loss; if any as per provisions of the law once this transaction is treated as capital gains. Thus these grounds of appeal raised by the appellant are allowed.

4. Ground no. 3(ii): 10 | P a g e

4.1 From the records it is seen that the Property No. 1E/20, Jhandewalan Extn., New Delhi-110055 was purchased vide agreement to sell dated 04.02.2011 for a consideration of Rs. 1,80,00,000/-, stamp duty of Rs. 10,80,000/- and other expenses of Rs. 50,100/- total consideration of Rs. 1,91,30,100/- The stamp duty on the said agreement (Agreement to Sell) had been paid at prevailing circle value during the FY 2010-11. 7.4.2 Further, upon conversion to freehold, the sale deed for the said property was registered on 27.07.2011. However, during the FY 2011-12, circle value of the property had been revised and