DCIT, JAIPUR vs. M/S GOVERDHAN BUILDERS PVT. LTD., JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SH. KUL BHARAT, JM & SH. VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 454/JP/2012 fu/kZkj.k o"kZ@Assessment Years : 2007-08 cuke The Deputy Commissioner of M/s Goverdhan Builders Vs. Income-tax Central Circle-2, Pvt. Ltd Jaipur 232, Himmat Nagar, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCG 4950 F vihykFkhZ@Appellant izR;FkhZ@Respondent

vk;dj vihy la-@ITA No. 455/JP/2012 fu/kZkj.k o"kZ@Assessment Years : 2008-09 cuke The Deputy M/s Goverdhan Builders Pvt. Ltd Vs. Commissioner of 232, Himmat Nagar, Income-tax Jaipur Central Circle-2, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCG 4950 F vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri Varindar Mehta (CIT) jktLo dh vksj ls@ Revenue by : Shri P.C. Parwal (CA) lquokbZ dh rkjh[k@ Date of Hearing : 28/03/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 10/04/2017

ITA No. 454 & 455/JP/2012 2 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd vkns'k@ ORDER

PER: VIKRAM SINGH YADAV, A.M.:

These are two appeals filed by the Revenue against two separate

orders passed by ld. CIT(A) Central, Jaipur of even date 29/02/2012 for

A.Y. 2007-08 & 2008-09 respectively. Since common issues are

involved, both the appeals were heard together and disposed off by this

common order. The grounds of appeal taken by the revenue are as

under:-

ITA No. 454/JP/2012:-

“1. Whether on the facts and circumstances of the case the CIT(A) Central, Jaipur has erred in law and on facts in deleting the addition of Rs. 14,55,022/- made by the AO on account of capital gain for conversion of capital asset in stock in trade. 2. Whether on the facts and circumstances of the case the CIT(A) (Central), Jaipur has erred in law and on facts in deleting addition of Rs. 15,00,906/- out of total addition of Rs. 17,00,906/- made by the AO on account of trading profit. ITA No. 455/JP/2012:-

“1. Whether on the facts and circumstances of the case the CIT(A) (Central), Jaipur has erred in law and on facts in deleting the addition of Rs. 23,06,308/- made by the AO on account of capital gain for conversion of capital asset in stock in trade. 2. Whether on the facts and circumstances of the case the CIT(A) (Central), Jaipur has erred in law and on facts in deleting addition of Rs. 30,26,822/- out of total addition of Rs. 33,26,822/- made by the AO on account of trading profit.”

ITA No. 454 & 455/JP/2012 3 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd 2. In the first ground of appeal for A.Y 2007-08, the Revenue has

challenged the action of ld.CIT(A) in deleting the addition of Rs.

14,55,022/- made by the AO on account of capital gain for conversion

of capital asset into stock entry .

2.1. The brief facts of the case are that the assessee acquired a piece

of land at Mauji Colony, Malviya Nagar, Jaipur in the financial year

1995-96 and thereafter, entered into a Development Agreement on

08.01.2005 with a developer Company named as M/s Finetech

Developer Private Limited, Jaipur. As per the Assessing Officer, the land was shown as capital asset in the balance-sheet as on 31st March, 2005

and the land has been converted into stock-in-trade in the subsequent financial year as apparent from the balance sheet as on 31st March

2006. The AO accordingly, applied the DLC rate of Rs. 13,000/- to

calculate the Fair Market Value for the purpose of computing capital

gains in terms of section 45(2) of the Act. According to the assessee,

the conversion of capital asset into stock-in-trade was ratified by Board

of Directors in its meeting held on 09.04.2005 wherein, the following

Board resolution was passed:

“RESOLVED that in accordance to provisions of DEVELOPMENT AGREEMENT made with M/s Finetech Real Estate Developeers Pvt. Ltd on 08-01-2005, the conversion of the land at plot no. E-21, Mauji Colony, Malviya Nagar, Jaipur, for which the above said agreement

ITA No. 454 & 455/JP/2012 4 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd made, into stock-in-trade is and be hereby confirmed as the Developer has submitted the drawings for construction to concern authorities.” The assessee further submitted that subsequently, the accounting entry was passed in the books of accounts on 10.4.2005. Accordingly, the date of 10.04.2005 was taken as date of conversion of the capital assets into stock entry by the assessee.

2.2 The ld. CIT(A) observed that the stand taken by the Assessing Officer was not correct and the FMV of the asset for the purposes of section 45(2) is to be taken on the date of conversion of capital asset into stock-in-trade and not as on the balance-sheet date which has been taken by the Assessing Officer and thereafter has given his finding at para 2.5.1 of its order which reproduced as under:-

“The moot issue to be decided is whether the land was converted from fixed asset into stock-in-trade as on 31.3.2006. The AR has rightly argued that the balance sheet date only reflects the position as on the end of the financial year and it does not mean that the land has been converted into stock-in-trade on 31.3.2006 only. This is misconceived approach of the AO. Accordingly, AO’s action of taking the FMV of the land as per DLC rate as on 31.3.2006 i.e. @ Rs. 13,000/- per sq.mt. is unjustified and cannot be upheld and therefore the addition so made by the A.O needs to be deleted. It was submitted that the land was converted into stock-in-trade on 10.4.2005 immediately after the Board’s resolution to that effect was passed by the Board of Directors of the appellant company on 9.4.2005. Firstly it is seen that the appellant company has entered into development agreement dated 8.1.2005 with M/s Finetech Developers Pvt Ltd to construct residential and/commercial apartments, for which appellant is entitled to 18% of the sale proceeds, remaining 82% being of developer. As the Board’s resolution to that effect was not passed by 31.3.2005 and realizing the same, immediately lateron on 9.4.2005, the Board’s resolution was passed. Accordingly, the land has to be shown as fixed assets as on 31.3.2005. Considering these facts and circumstances, and there being no contrary evidence brought out on record by the AO., the date of conversion of land into stock in-trade is to be taken as 10.4.2005 considering the Board’s resolution dated 9.4.2005, as shown by the appellant. Accordingly, FMV

ITA No. 454 & 455/JP/2012 5 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd has to be determined as on 10.4.2005 for the purpose of section 45(2). The DLC rate on 10.4.2005 was Rs. 9,000/- per sq.mt, whereas the appellant has taken the FMV @ Rs. 9,200/- per sq.mt, which is slightly more than the DLC rate. Therefore, there is no justification to disturb the FMV of the land so shown by the appellant. Hence, the addition on account of capital gain by taking the FMV as on 31.3.2006 by the AO is hereby deleted in both the years under appeal.” 2.3. It is not in dispute that the capital asset has been converted into stock-in-trade by the assessee. The limited issue under dispute relates to the date of actual conversion of capital asset into stock-in-trade. The balance sheet date reflects the position as on the year-end and the said date cannot be taken as date of conversion unless the conversion or treatment of the capital asset into stock-in-trade has happened on the said date. The undisputed facts are that conversion or treatment of the capital asset into stock-in-trade has not happened on 31.03.2006. The ld. CIT(A) after into consideration the signing of the development agreement on 8.01.2005, Board Resolution dated 9.4.2005 and accounting entry passed by the assessee in its books of account on 10.04.2005 has rightly held that the date of conversion of capital asset into stock-in-trade should be taken as 10.4.2005. Accordingly, we do not find any infirmity in the order of the ld.CIT(A) which is hereby confirmed. Accordingly, ground No. 1 of the Revenue’s appeal is dismissed.

3.1. The Assessing Officer has allowed only 18 % on the land cost in the hands of the assessee while calculating the business profit. Further,

ITA No. 454 & 455/JP/2012 6 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd the Assessing Officer has held that the flats in the project has been sold at a rate much lower than even the DLC rate. Further, the Assessing Officer has challenged the profit sharing ratio of 18:82 as has been worked out between the assessee and the developer in terms of the development agreement for sharing the sale proceeds out of sale of flats.

3.2. In this regard, the relevant finding ld. CIT(A) are contained at para 3.4 of its order which is reproduced as under:

“I have considered the submission of ld. AR and have perused the material on record. Normally any developer agreement between the land owner and the developer envisages contribution of the land by the land owner like that of appellant and all the expenses on developing the land, getting the maps etc approved, getting the planning done and on construction as well as marketing, selling etc is borne by developer Then in between them the sale proceeds ratio or profit sharing ratio is decided considering the various factors like cost of land, cost of construction, other misc. costs, selling price etc. This sharing ratio may vary according to facts of the case. Thus the land owner gets its share of the sale proceeds against its contribution of land and developer gets its share of the sale proceeds against various construction and other expenses. Thus, as far as cost of land is concerned, it is relatable to/borne by the land owner and constructions expenses are concerned, it is borne by developer. Nowhere it is envisaged that the proportion in which in sale proceeds are to be divided, the land cost is also to be divided in the same proportion. Accordingly, action of the A.O is totally unjustified and against the language as well as the spirit of the development agreement. Business profit for the appellant land owner cannot be worked out by just allowing 18% of the land cost as its expenses. Therefore, the basis of addition made by the A.O itself being totally against not only the developer agreement but also against the accounting practices and further against generally accepted practices, the addition made by the A.O cannot be sustained. However, considering the defects pointed out by the A.O that the sale rate shown is quite less than the DLC rate and moreover also the defect that the sharing ratio of the appellant company is very low which is also not very justifiable and considering the application of decision of Hon’ble

ITA No. 454 & 455/JP/2012 7 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd Supreme Court in the McDowell & Co. Ltd vs. CTO Ltd 154 ITR 148 and various other decisions cited by the A.O, it will be appropriate to estimate the business profit of the appellant after rejecting book results at Rs. 2 lakh for A.Y 2007-08 and Rs. 3 lakh for A.Y 2008-09 against the business loss of Rs. 13,24,168/- and Rs. 15,90,568/- shown by the appellant.” 3.3. We have heard the rival submissions and pursued the material

available on record. In terms of section 45(2) of the Act, fair market

value of the asset converted into stock-in-trade is deemed as full value

of consideration for the purposes of determining the capital gains and

the capital gains are computed after taking into consideration the cost

of acquisition of such assets in the hands of the assessee. The next

transaction that will arise is sale of such stock-in-trade. The question

that arises for consideration is how would the profit be computed at a

time of sale of such stock-in-trade.

3.4 In this regard, the ld. CIT(A) has held that it is not correct to hold

that the proportion in which the sale proceeds are to be divided

between the assessee and the developer should be considered and the

land cost to be divided in the same proportion. Accordingly, the action

of the AO was held not justified by the ld CIT(A) and it was held that

the business profit for the appellant cannot be computed by just

allowing 18% of the land cost as its expenses. We agree with the said

findings of the ld. CIT(A) that the profit sharing ratio of the sale

ITA No. 454 & 455/JP/2012 8 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd proceeds should not be a basis to limit the proportion of land cost in the

hands of the assessee. It is undisputed fact that the assessee has

contributed whole of its land which has subsequently been developed

by developer who is responsible for the construction and development

of the project including sales thereof. The profits that has to be

computed in the hands of the assessee should therefore take into

consideration the whole of land cost in hands of the assessee.

3.5 Now coming to the second issue regarding substitution of the

land cost by fair market value of such land cost as on the date of

conversion for the purposes of computing the business profits. In this

regard, the Hon’ble Supreme Court in case CIT vs. Bai Shirinbai K.

Kooka [1962] 46 ITR 86 has held that the assessable profit as business

profit would be the difference between the sale price of stock-in-trade

and Fair Market Value so converted/treated in/as stock-in-trade

prevailing on the date when such conversion takes place. In instant

case, we find that the AO while computing the business profits has not

considered such fair market value on the date of conversion and

further, has allowed only 18% of the cost of the land (considered while

computing the capital gains u/s 45(2)) in computing the business profit

of the assessee company. Regarding substitution of such actual land

cost in his hands of the assessee by the full value of consideration as

ITA No. 454 & 455/JP/2012 9 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd contemplated u/s 45(2) of the Act, there is no finding given by the ld.

CIT(A) in this regard and we are unable to comment on the same. The

issue therefore needs to be set –aside to the file of the ld.CIT(A) to

decide the same afresh taking into consideration the decision of the

Hon’ble Supreme Court in case of Bai Shirinbai K. Kooka.

3.6. Further, from perusal of the records, it is unclear how the sale

proceeds have been determined by the assessee and what was the

corresponding DLC rate prevailing at that point of time and the reasons

for the variance. It is also unclear how the profit sharing ratio of 18:82

has been determined between the assessee and the developer in terms

of the development agreement executed on 8.1.2005. Further, it is

unclear how the ld. CIT(A) while upholding the observations of the AO

regarding the sales realization and profit sharing ratio has estimated the

business profit at Rs. 2 lacs for AY 2007-08. In our view, the matter

requires a fresh examination and we deem it fit to restore it back to the

file of the ld. CIT(A) to examine the same afresh taking into

consideration the above discussions. In the result, ground No. 2 of the

revenue is allowed for statistical purposes.

In the result, appeal of the revenue is party allowed for statistical

purposes.

ITA No. 454 & 455/JP/2012 10 The Deputy Commissioner of Income-tax Vs M/s Goverdhan Builders Pvt. Ltd ITA No. 455/JP/2012

appeal and the facts of the case in ITA No. 454/JP/2012. The finding

and direction contained in ITA No. 455/JP/2012 shall apply mutatis

mutandis to this appeal. Thus the appeal of revenue in ITA No.

455/JP/2012 is partly allowed for statistical purposes.

In the result, both the appeals of revenue are partly allowed for statistical purposes.

Order pronounced in the open court on 10/04/2017.

Sd/- Sd/- (KUL BHARAT) (VIKRAM SINGH YADAV) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 10/04 /2017 *Ganesh आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- The Deputy Commissioner of Income-tax 2. izR;FkhZ@ The Respondent- M/s Goverdhan Builders Pvt. Ltd vk;dj vk;qDr@ CIT –TDS, Jaipur 3. vk;dj vk;qDr¼vihy½@The CIT(A)-III, Jaipur 4. 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No.454 & 455 /JP/2012)

vkns'kkuqlkj@ By order,

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत