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Facts
The assessee sold land and claimed exemption under Section 54F, treating the gain as long-term capital gain. The Assessing Officer reclassified the gain as business income, disallowed the 54F exemption (partially for being excessive and partially due to reclassification), and the CIT(A) upheld this. The assessee appealed, challenging both the merits of reclassification/disallowance and the AO exceeding the scope of limited scrutiny.
Held
The tribunal quashed the assessment proceedings, finding that the Assessing Officer had exceeded the scope of the limited scrutiny. The case was selected for limited scrutiny on specific issues, and the disallowance of Section 54F on the grounds that the asset was stock-in-trade was not part of those specified reasons. Consequently, the merits of the additions became academic as the assessment itself was quashed.
Key Issues
1. Whether the Assessing Officer can make additions/disallowances beyond the scope of issues for which a case was selected for limited scrutiny without converting the assessment to full scrutiny. 2. Whether the disallowance of exemption under Section 54F on the grounds of reclassifying capital asset to business stock-in-trade was valid given the limited scrutiny scope.
Sections Cited
143(3), 143(1), 142(1), 54F, 45(2), 2(47)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
Date of Hearing : 01/05/2025 Date of Pronouncement : 30/ 06/2025 आदेश / O R D E R Per, Dr. A. L. Saini, AM:
By way of this appeal, the assessee has challenged correctness of the order dated 27-05-2024 passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act 1961, for the assessment year 2015-16.
Grievances raised by the assessee are as follows.
(1).The Learned CIT(A) has erred in upholding assessment of gain of Rs. 1,01,04,063/- as business income, as against long term capital gain and thereby, disallowing claim of exemption u/s 54F of the Act made by the assessee. (2) The Learned CIT(A) has erred in upholding the finding of the assessing officer that claim of deduction u/s 54F of the Act, in any case, is excessive by Rs. 14,84,766/-. (3). The Learned CIT(A) has erred in upholding the validity of disallowance of claim under section 54F of the Act, made by the Assessing officer which is beyond the scope of limited scrutiny under CASS.
(4) The assessee craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal.
The relevant material facts, as culled out from the material on record, are as follows. The assessee has filed his return of income on 31.08.2015, declaring therein total income of Rs. 6,14,880/-. The return of income was processed u/s. 143(1) of the Income Tax Act, 1961 (hereinafter, ‘the Act’). The assessee`s case was selected for scrutiny through CASS for limited scrutiny with reasons, namely : (i) Large deduction u/s. 54B, 54C, 54D, 54G, 54A, (ii) Sale consideration of property in ITR is less then consideration reported in Form No. 26QB. (iii). Substantial increase in capital in a year.
Accordingly, a notice u/s 143(1) of the Act was issued on 19.09.2016 and duly served upon the assessee. The notices u/s 142(1) of the Act, calling for various details were issued and served upon the assessee. In response to the aforesaid statutory notices, the assessee attended the proceeding on the dates of hearing and submitted the required details from time to time. The books of accounts, bills/vouchers were produced by the assessee and same were verified by the assessing officer. The assessee is engaged in the business of fashion items and construction business along with partner in a hotel (Bhabha King Stone) and also having income from various house properties, as rent income. The case has been selected for limited scrutiny and one of the reason is deduction claimed under the head Capital gains. On verification of records, it was found by the assessing officer that, during the year under consideration, the assessee has sold one large piece of land and claimed deduction u/s. 54F of the Act. Close scrutiny of the transaction revealed that, the land was transferred by virtue of one development agreement with the one M/s. Shalibhadra Avenue, whose owner is Shri Rajesh Maganlal Mehta, Uncle of the assessee. As per this agreement, the assessee has received Rs. 1,14,00,000/-. This has been worked out as capital gain. The assessee has shown purchase of another house property 2 for a sum of Rs. 73,27,000/-. Out of this, 50% was shown purchase of his brother Shri Paras Mehta, without executing any transfer deed or getting the sale officially registered. This transfer was only Rs. 37,01,000/-. The assessee thereafter showed huge cost of improvement in the development of the new acquired property and the entire sum was claimed as exempt u/s. 54 of the Act, thus, reducing the taxable capital gain to a nominal sum. It is further seen that, the impugned land transferred by virtue of development agreement on which the assessee is liable for capital gains, was converted into stock in trade by the assessee on 04.02.2011 ( A.Y. 2011-12) and the assessee’s computation of income for assessment year 2014-15 shows that the assessee has sold Mavdi land and earned profit of Rs. 3,75,000/-. Therefore, since land has already been converted into stock in trade and as the assessee had already offered part profit in the immediate preceding year. Therefore, the nomenclature of the asset under consideration is no more a capital asset, but stock in trade ( business asset) and hence, the assessee is not eligible for claim of deduction u/s. 54F of the Act. Hence, the assessee was asked to show -cause, as to why the claim of deduction u/s. 54F be not withdrawn. The assessee was also asked to show- cause as to why his activity of entering a pre-determined receipt of Rs. 3,00,000/- per each flat, should not be treated as adventure in the nature of trade.
In response to the above notice of the Assessing Officer, the assessee submitted before the Assessing Officer, that notional profit arising from transfer by way of capital assets into stock in trade is chargeable to tax in the year in which stock -in- trade is sold/transferred. The provision of section 45(2) of the Act, provides that although such a conversion of capital assets into stock- in- trade of a business, carried on by the assessee, will be a transfer in the previous year, in which the assets is so converted, but actual capital gain will not arise in the previous year in which assets is converted into stock- in- trade, however, the capital gain arises in the year in which the asset is sold or otherwise transferred.
Further, only sale price minus market value as on sale of conversion shall be treated as business income and can be taxed under the head “ Profits and gain of business and profession.” The assessee, for the year under consideration, has offered income against the said property to the tune of Rs. 9,50,000/-, under the head “profits and gain of business and profession”. The assessee has offered tax in both the heads, that is, “profits and gain of business and profession” and “Capital Gains”. Therefore, the assessee has did the right treatment in the books of accounts, so far capital gain and business income is concerned. Therefore, no addition should be made in the hands of the assessee.
However, the Assessing Officer rejected the contention of the assessee and held that the nomenclature of plots held by the assessee and given for development by virtue of development right, is nothing but transfer / sale of business asset and hence the assessee is not eligible for deduction u/s 54F of the Act. The assessing officer also noticed that the assessee`s case is the adventure in the nature of trade, entered into by the assesses. The assessee by virtue of development right and claiming a sum of Rs. 3.00 lacs fixed on each of the constructed residential flat, is nothing but adventure in the nature of trade. Therefore, the assessee is not eligible for deduction u/s 54F of the Act. The assessing officer also noticed that the assessee had sold the plot at Mavadi area in piece-meal in two years: viz., A.Y. 2014-15 and 2015-16. The assessee had claimed deduction of Rs 1,01,04,063/-. Against this, as per the balance sheet, assessee had made investment of Rs.1,34,94,760/- (Rs 81,29,500 + Rs. 53,65,260/-). Against this, Rs. 48,75,463/- was already claimed last year against capital gain which arose in that year and thus reduced his capital gain to that extent last year. Therefore, the net investment made was only Rs. 86,19,297/- (Rs.1,34,94,760- Rs. 48,75,463). Thus, the claim of Rs. 1,01,04,063/-, u/s 54F during the year is excessive to the extent of Rs. 14,84,766/- (Rs 1,01,04,063 - Rs.86,19,297). Therefore, assessing officer noticed that assessee has wrongly worked out the claim of deduction. Therefore, the claim of deduction u/s 54F of the assessee, was fully disallowed in two parts, that is, out of the total claim of Rs. 1,01,04,063/-, the amount of Rs. 14,84,766/- was disallowed by the assessing officer, holding that it is anyway not invested and the remaining sum of Rs. 86,19,297/- was disallowed, as the assessee is not eligible for deduction u/s 54F of the Act, as the asset in question was business stock -in- trade and the same was therefore treated by the assessing officer, as adventure in the nature of trade.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal, before ld CIT(A), who has confirmed the action of the Assessing Officer. The learned CIT(A) has not given any finding from his side, however, he has narrated the facts stated in the assessment order ( which we have already noted in our earlier para of this order) and then confirmed the addition made by the assessing officer.
Aggrieved by the order of the learned CIT(A), the assessee is in further appeal before us.
Shri Vijay Mehta, Learned Counsel for the assessee, vehemently argued that Section 2(47) of the Income-tax Act, provides that any conversion of capital asset into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year. However, section 45(2) of the Act, post- pones the assessment of such capital gains to the year in which the stock-in- trade is actually sold or otherwise transferred by the assessee. In the assessee`s case the said converted property is sold/transferred in the year under consideration and the Assesses has rightfully disclosed as capital gains along with disclosing income from Profits and gain of business and profession. Therefore, considering these facts, the Ld. Counsel for the assessee contended that addition made by the assessing officer may be delete. The Ld. Counsel also pointed out that assessing officer made addition beyond the scope of limited scrutiny.
On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld. CIT(A) and other materials brought on record. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication.The assessee had sold the plot at Mavadi area in piecemeal in two years, viz., A.Y. 2014-15 and 2015-16. The assessee had claimed deduction of Rs. 1,01,04,063/-. Against this, as per the balance sheet, he had made investment of Rs. 1,34,94,760/- (Rs 81,29,500 + Rs 53,65,260). Against this, Rs. 48,75,463/- was already claimed last year against capital gain which arose in that year and thus reduced his capital gain to that extent last year. Therefore, the net investment made was only Rs 86,19,297/-. Thus, the claim of Rs. 1,01,04,063/- u/s 54F during the year is excessive to the extern of Rs 14,84,766/- (Rs. 1,01,04,063 – Rs. 86,19,297). Therefore, the assessing officer held that the assessee has wrongly worked out the claim of deduction. Therefore, the claim of deduction u/s 54F was fully disallowed in two parts. Out of the total claim of Rs 1,01,04,063/-, Rs. 14,84,766/- was disallowed by the assessing officer as it is anyway not invested and the remaining sum of Rs. 86,19,297/- was disallowed as the assessee is not eligible for deduction u/s. 54F of the Act, as the asset in question is business stock in trade and the same was treated as adventure in the nature of trade. 6
We note that in the ground No.3, the assessee has challenged the jurisdiction of the Assessing Officer in rejecting the claim of exemption u/s 54F of the Act, while completing the proceedings, under the limited scrutiny assessment. The ground No.3, raised by the assessee, is reproduced below for ready reference: “(3). The Learned CIT(A) has erred in upholding the validity of disallowance of claim under section 54F of the Act, made by the Assessing officer which is beyond the scope of limited scrutiny under CASS.”
We have gone through the assessment order. As it is evident from the recital of the Assessing Officer, on page no. 1 of his order, stating that : “the case was selected for limited scrutiny assessment on the issues of (i) Large deduction u/s 54B, 54C, 54D, 54G, 54A (ii) sale consideration of property in ITR is less than consideration reported in Form 26QB and (iii) substantial increase in capital in a year.” The above issues of the limited scrutiny assessment have also been communicated to the assessee, vide letter of the Assessing Officer, dated 09-01-2017, the deduction claimed by the assessee u/s 54B, 54C, 54D, 54G or 54A of the Act. However, we note that no any such disallowance has been made by the Assessing Officer. Besides, there is no addition on account of sale consideration or increase in capital, in the assessment order. The Assessing Officer has, rather, rejected the assessee`s claim of exemption u/s 54F of the Act. Thus, the Assessing Officer has travelled beyond the scope of his jurisdiction and hence his action is required to be set aside on this ground itself. We note that Assessing Officer could have enlarged the scope of assessment after converting the case from 'limited scrutiny' to 'full scrutiny', after taking necessary administrative approval, however, no such action has been taken by the Assessing Officer. Therefore, the action of the Assessing Officer, being in violation of provisions of the Act, and binding CBDT circulars. In support of the above submissions, the Ld. Counsel for the assessee has relied upon the following judicial pronouncements wherein it has been held that the assessing officer cannot travel beyond the scope of limited scrutiny issues: (a) Balvinder Kumar v. PCIT [125 Taxmann.com 83 (Del)] (b) Smt. Gurpreet Kaur v. ITO (ITA No: 87/Asr/2016) dated 24.03.2016 (c) Shashi Bhushan Majoor v ITO (ITA No: 1589/Pun/2018) dated 04.04.2019 (d)CBS International Projects P. Ltd v ACIT (ITA No: 144/Del/2019) dated 28.02.2019 (e) Lokesh Sadashiv Shetty v. ITO (FTA No: 741/Pun/2018) dated 20.02.2019. (f) Suresh Jugraj Mutha v. Addl. CIT (ITA No: 05/Pun/2016) dated 04.05.2018 (g) Garen Chandramouli Khammam v. ITO (ITA No: 429/Hyd/2018) dated,03.04.2019 14. Therefore, we find that if a case is taken for limited scrutiny by the assessing officer, he cannot exceed the jurisdiction beyond the one which he has carved out himself in the notice issued for limited scrutiny. In the present case, the Assessing Officer has travelled beyond his jurisdiction and made addition on the issues which are not part of the reasons for limited scrutiny. Therefore, both the assessing officer as well as Ld. CIT(A) has committed an error in making the addition/disallowance and sustaining the same which requires to be set-aside. Accordingly, the addition made by the assessing officer and sustained by the Ld. CIT(A) is hereby deleted.
We, therefore, quash the assessment proceedings, on account of ground No. 3 raised by the assessee in respect of scope of limited scrutiny. As the assessment itself is quashed, all other issues on merits of the additions, in ground Nos. 1 and 2, (raised by the assessee) are rendered academic and infructuous.
In the result, appeal filed by the assessee, is allowed.