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Facts
A search and seizure action on M/s. Brigade Enterprise Ltd. led to proceedings against the present assessees (sister concerns). The AO found undeclared income from transactions involving land as stock-in-trade converted into a Joint Development Agreement (JDA), taxing the difference in value as business income in AY 2017-18. Assessee contended it was an exchange and tax was due only upon sale, while the CIT(A) partly allowed the appeal but directed a specific valuation rate.
Held
The Tribunal held that the conversion of capital asset to stock-in-trade occurred in AY 2008-09, and the year of taxability for business income arising from the sale of stock-in-trade is not AY 2017-18. It found that the CIT(A) adopted a valuation rate without proper basis and directed that the matter of valuation and the correct year of taxability be restored to the Assessing Officer for fresh examination, with a referral to the departmental valuation officer.
Key Issues
1. The correct assessment year for taxing business income arising from the conversion of a capital asset into stock-in-trade and subsequent development under a JDA. 2. The appropriate valuation method and rate for the developed area received by the assessee.
Sections Cited
153C, 45(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI PRAKASH CHAND YADAV
Both these appeals of the revenue are arising from the order of ld. CIT(A) dated 30.6.2024 and relates to assessment year 2017- 18. Since both the assessee are sister concerns having same facts and circumstances, we are deciding these appeals by way of this consolidated order.
M/s. Nalapad Properties, Bangalore & M/s. Nalapad Hotels & Convention Centre, Bangalore Page 2 of 7 2. Brief facts as coming out from the order of the authorities below are that a search & seizure action was conducted in the case of M/s. Brigade Enterprise Ltd. on 02.11.2017. During the course of search, certain incriminating documents in the form of Joint Development Agreements (JDAs), sale deeds etc, were found and seized. The A.O. of the searched person observed that these documents were pertaining to the present assessees, therefore, action u/s 153C of the Income Tax Act, 1961 (in short “The Act”) has been taken in the case of the assessees. Accordingly, notice u/s 153C of the Act have been issued to both the assessees on 24.3.2020. During the course of assessment proceedings, the AO observed that the assessee has not offered any income arising on account of transactions with M/s. Brigade Enterprise Ltd. The relevant observations of the AO in para 15 to 17 are as under:
2.1 Thereafter, the AO took a view that addition of Rs.131,31,70,760/- is liable to be taxed as business income in the hands of the assessee.
Aggrieved with the order of AO, the assessee preferred an appeal before the ld. CIT(A) and argued that the view of the AO that business income is liable to be taxed in this year as legally not sustainable since in terms of the provisions of section 45(2) of the Act, the business income on account of conversion of capital asset into stock in trade is taxable in the year when the asset is finally sold. The ld. CIT(A) partly allowed the appeal of the assessee. However, he directed the AO to adopt the rate of Rs.3085.50ps. per sq.ft for calculating the income of the assessee.
Aggrieved by the order of ld. CIT(A) both the assessees as well as revenue has come up in appeals. While deciding the appeal of the assessee, the coordinate bench of the ITAT in dated 16.8.2024 in para 7.34 to 7.37 has observed as under:
“7.34 Now the next question is with regard to computation of business income after conversion of capital asset into stock in trade. 7.35 After conversion of capital asset into stock in trade of business of assessee then the fair market value on the date of conversion is considered as full sale M/s. Nalapad Properties, Bangalore & M/s. Nalapad Hotels & Convention Centre, Bangalore Page 4 of 7 consideration of such capital asset for the purpose of capital gain or loss, such fair market value is considered as cost of such asset as converted into stock in trade and at the time of sale of such stock in trade, the same price i.e. as realized from the sale of such stock in trade wholly or partially as the case may be will be deducted from the fair market value of such asset as existing on the date of conversion i.e. the cost price of stock in trade and the profit arising therefrom, if any shall be treated as income under the head “business & profession”, when such sale took place in the relevant assessment year only and not otherwise. 7.36 In the present case, since there is no dispute that capital asset has been converted into stock in trade on the date of entering into JDA i.e. 7.1.2008 relevant to AY 2008-09, and capital gain accrued on such conversion of capital asset into stock in trade, to be computed with the fair market value as on date of conversion of the land being treated as full value of consideration. Thus, the deemed capital gain on said conversion of capital asset, to be taxed on the actual sale of said converted asset along with the assessee share of constructed area. However, the ld. AO assessed the entire value of constructed area after deducting the cost of the land as business income in assessment year 2017-18 on the ground that the developer has got the O.C./CC on 21.7.2016 which is not correct. At this point, we place reliance on the judgement coordinate bench of Madras in the case of M/s. Essrope Mills ltd. in dated 11.7.2013, wherein held that the gain on transfer of capital asset up to the date of conversion in to stock has to be assessed under the head capital gain 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 assessing officer computed the entire sale consideration under the head long term capital gain, he did not apply the provisions of section 45(2) of the Act. Therefore, the ld. AO should compute the business income in respect of stock in trade of the property i.e. the sale of stock in trade, taking into consideration section 45(2) of the Act in the year of sale of stock in trade and not in the assessment year 2017-18 since there was no sale of constructed area of assessee’s share. There was no provision in the Act which deals with the determination of business income or capital gain on conversion of investment into stock in trade which is later on sold as business income of the assessee in whole without following the provisions of section 45(2) of the Act. In our opinion, the assessee income has to be computed u/s 45(2) of the Act when the stock in trade has been actually sold by the assessee and not in the assessment year when the developer has got the OC/CC from the BBMP. At this time it is appropriate to take support from the judgement of Kolkata High Court in the case of CIT Vs. Dhanuka & Sons 124 ITR 1, where it has been held that profit & gains arising from shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because a person have a transaction with himself and in turn such profit cannot be taxed. If such shares can be disposed at a value other than the value at which it was transferred from the business stock the question of capital loss or capital gain would arise. Being so, in the present case, on applying the section 45(2) of the Act the income to be charged to tax in the year of sale of stock in trade as follows:
M/s. Nalapad Properties, Bangalore & M/s. Nalapad Hotels & Convention Centre, Bangalore Page 5 of 7 (A) Taxation at the time of conversion of capital asset into stock in trade:
1. 1. Sales consideration at the time of entering in to JDA on 17.1.2008 by transferring the land as a capital asset; The fair market value of capital asset on the date of conversion shall be deemed to be the sale consideration.
2. Indexation benefit for cost of acquisition and improvement will be considered upto the year of conversion of capital asset into the stock in trade i.e. up to assessment year 2008-09.
3. Year of taxability – Capital gain will be taxed in the year in which stock in trade is sold and not in the AY 2017-18. B. Taxation at the time of sale of stock in trade – When the stock in trade is sold, the assessee needs to pay the tax under the head “Business Income”: 1. Sale consideration – The Sale proceeds of stock in trade will be considered as Sale consideration.
2. Purchase cost – The purchase cost of stock in trade is fair market value on the date of conversion.
3. Year of taxability – The Business Income will be taxable in the year in which stock in trade is sold and not in the AY 2017-18. 7.37 Thus, there cannot be any taxability of income in the assessment year 2017- 18 as there was no whole or part sale of stock in trade in the assessment year under consideration. In view of the above discussion, this ground No.2 of appeals of the assessee is allowed.”
The ld. D.R. appearing on behalf of the revenue has filed additional ground of appeal as under: “(i) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in directing the AO to adopt the guideline value/circle rate at Rs.3085.50 per sq.ft. merely based on explicit request of the assessee, who in turn has not provided any rationale behind it or a scientific method how it has arrived at it?”
6. It is relevant to mention here that this additional ground has been raised vide application dated 10.12.2024. However, the matter was heard by the Bench on 4.12.2024, which means the revenue has filed the additional ground after the completion of hearing. Therefore, in order to comply with the principles of natural justice, we have re-fixed this matter for clarification on 27.1.2025.
M/s. Nalapad Properties, Bangalore & M/s. Nalapad Hotels & Convention Centre, Bangalore Page 6 of 7 7. Ld. A.R. strongly objected to the admission of the additional ground after completion of the hearing and ld. D.R. relied upon the application filed by the department in support of the additional ground, explaining the delay in filing the additional ground.
We have heard the rival submissions. In the interest of justice, we admit this ground of appeal and proceed to decide the matter as under.
8.1 The Ld DR vehemently argued that the order of the Ld CIT(A) directing the AO to adopt the value of Rs.3085.50 per sq.ft is not tenable in view of the fact that the CIT(A) has accepted this value without verifying the same from the AO and has proceeded without any basis. Ld DR drawn the attention of the Bench towards the order of the CIT(A) and contended that there is absolutely no basis for arriving at the value of Rs.3085.50 per sq. ft.
8.2 On the other hand Ld Counsel for the assessee relied upon the order of the CIT(A). Finding of the Bench:- 8.3 After considering the rival submissions we observe that it is an undisputed fact that the assessee has converted the capital asset into stock in trade in assessment year 2008-09 and thereafter entered into a Joint Development Agreement (JDA) with M/s. Brigade Enterprise Ltd. We further observe that it is also an admitted position of fact that the assessee has got the Occupancy Certificate with respect to completion of building of the developed area on 21.7.2016. It is also an admitted position of fact that the coordinate bench of the ITAT in assessee’s own case cited (supra) has categorically observed that year of taxability is not assessment year 2017-18 and it is the year when the assessee has sold the M/s. Nalapad Properties, Bangalore & M/s. Nalapad Hotels & Convention Centre, Bangalore Page 7 of 7 whole or part of the building. Now the only issue which we require to adjudicate in departmental appeal is whether the ld. CIT(A) is correct in directing the AO to take the value at Rs.3085.50ps. Per sq ft. We are of the view that ld. CIT(A) is not an expert for valuation purposes, therefore, this matter is to be referred to the valuation cell by the assessing officer to ascertain the correct valuation of the developed area and also the year of taxability of the amount in dispute. The AO will also examine in which year the assessee has sold the premises and has offered the income attributable to such sale. With these observations we restore this matter to the file of AO for examining afresh with a direction that the matter may be referred to the departmental valuation officer to decide in accordance with law. Needless to say, that the AO will grant sufficient opportunity to the assessee before passing any final order.