ADDL. CIT, GHAZIABAD vs. M/S AMRIT CORP LTD., GHAZIABAD

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

These four appeals have a common issue and were heard

together. For the sake of convenience, they are being disposed of

through this common order. ITA 1789/Del/2011 is appeal filed

by the assessee for AY 2007-08 whereas ITA 2163 is the cross

appeal by the Department. ITA 4579/Del/2011 has been

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 preferred by the assessee for AY 08-09 whereas ITA

5337/Del/2011 is the cross appeal be the Department.

2.0 The brief facts of the case are that the assessee owned

77,638 sq. yards of industrial land since 1940-41 at G.T. Road,

Ghaziabad. The land was always shown as capital asset by the

assessee since beginning in the books of accounts. It is on this

very land, that the Ghaziabad Vanaspati Unit of the assessee was

located. On closure of the said Ghaziabad Vanaspati unit, the

assessee, pursuant to a scheme of rehabilitation in the financial

years 2001 -02/2002-03, decided to sell surplus land of the said

unit. Based on the aforesaid, from the financial year 2002-03,

relevant to the assessment year 2003-04, the assessee started

selling the surplus land. Gains arising on sale of the surplus land

were declared under the head 'capital gain’ by the assessee in the

returns of income for the assessment years 2003-04 to 2006-07.

During the relevant previous year 2006-07, the assessee had

offered for taxation ‘ long term capital gain’ of Rs. 1,68,93,649/-

and ‘business income’ of Rs. 1,32,84,593/- on account of sale of

industrial land measuring 7681.458 sq. yards, which was

converted into stock in trade during the relevant previous year

2006-07, by applying the provisions of section 45(2) of the

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 Income Tax Act, 1961 (The Act). The assessing officer, however,

held/ observed that the assessee had converted the above land

from capital asset to stock-in-trade during the financial year

2002-03 and not in the financial year 2006-07, as claimed by the

assessee. Accordingly, the assessing officer proceeded to re-

compute ‘long term capital gains’ and ‘business income’ of the

assessee. The AO disputed the assessee adopting the value of

land at Rs. 190/- per sq. yard as on 1.4.1981 (based on valuer’s

report) and adopted the rate of Rs. 20/- per sq. yard being the

value fixed by the Uttar Pradesh State Industrial Development

Corporation (UPSIDC). The AO proceeded to make an addition of

Rs. 24,78,670/- being the difference/short computation of Long

Term Capital Gain arising out of the difference in valuation.

Consequentially, the AO took the business profit on sale of

land/plots at Rs. 2,48,10,528/- in place of business profit shown

by the assessee at Rs. 1,32,84,593/- and the difference of Rs.

1,15,25,935/- was added to the income of the assessee.

2.01 Similarly, for AY 2008-09, the AO added back a sum of Rs.

11,52,246/- on account of difference in the working of long term

capital gain due to the difference in valuation rates of Rs. 190/-

per sq. yard as adopted by the assessee and Rs. 20/- per sq. yard

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 as adopted by the AO. Further, the AO also made an addition of

Rs. 55,71,333/- on account of difference in the business profit

which was shown by the assessee at Rs. 76,39,932/- whereas the

AO computed the same at Rs. 1,32,11,265/-.

2.02 The assessee approached the Ld. First Appellate Authority

who partly allowed the appeals of the assessee for both the years

by directing the AO to adopt the circle rate of Rs. 100/- per sq.

yd. for the determination of fair market value on 1.4.1981.

2.03 Now, both, the assessee as well as the Department, have

approached the ITAT.

2.04 The assessee is challenging the action of the Ld. CIT (A) for

both the assessment years under appeal in confirming the action

of the AO in holding that the assessee had converted the

impugned industrial land into stock in trade during FY 2002-03

thereby attracting the provisions of section 45(2) of the Act in

that year as against the assessee’s claim that the conversion took

place in the financial year 2006-07. The assessee is also

challenging the action of the Ld. CIT (A) in directing the AO to

adopt the Fair Market Value as on 01/04/1981 at Rs. 100/-sq.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 yard as against Rs. 190/- per sq. yard adopted by the assessee

for the purpose of computation of capital gains.

2.05 The Department is challenging the action of Ld. CIT (A) in

both the years under appeal in directing the AO to take the Fair

Market Value (FMV) of land on 01/04/1981 @ Rs. 100/- per sq.

yard as against Rs. 20/- per sq. yard adopted by the AO.

3.0 The Ld. AR submitted that the primary issue that arises for

consideration is whether the industrial land was converted into

stock in trade on 01.04.2002 (as held by the assessing officer) or

on 01.04.2006 (as contended by the assessee)? It was submitted

that the following facts demonstrate that the Industrial

Land was held as Capital Asset till assessment year 2006-

07 are as under:-

(i) The industrial land under consideration was held since

1940-41 and housed the Ghaziabad Vanaspati Unit of the

assessee. Thus, there can be no dispute that the land was not

acquired and held for sale but for exploitation/ use as a capital

asset.

(ii) Sale of land was part of the Rehabilitation Scheme framed

by the Board for Industrial Finance and Reconstruction (BIFR)

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 and on the directions of the BIFR, an Asset Sale Committee (ASC)

was constituted for the purpose of sale of asset of the erstwhile

Ghaziabad Vanaspati Unit, including the surplus land.

Furthermore, the sale consideration was used to fund the cost of

rehabilitation scheme and repayment of loans.

(iii) In the financial statements for the years ended 31st March

2003 to 31st March, 2006, the land sold by the assessee was

shown as capital asset in Schedule “E- Fixed Assets”.

(iv) Under the Companies Act and as per the applicable

mandatory Accounting Standards, every company is required to

give segment wise results of all the business segments. Had the

sale of land been part of the business of the assessee, the same

would have constituted a separate business segment of the

assessee and the assessee would have had to declare separately

the results of the said segment. However, from perusal of the

financial statements for the financial years 2002-03 to 2005-06,

it will be evident that real estate has not been shown as a

separate business segment, which also goes to prove that land

was not held as 'stock in trade’ by the assessee-company during

the relevant year.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 (v) Profit on sale of land was separately shown as

‘Extraordinary income’. Further, in the profit and loss account,

only profit on sale of land was shown and not the gross

consideration received.

(vi) The assessee also paid wealth tax on the land before

converting such land into stock in trade.

(vii) The wealth tax returns were filed by the assessee for

Assessment Years 2003-04 to 2006-07 wherein the land at

Ghaziabad was shown as taxable asset and substantial wealth

tax was paid thereon as follows:-

Financial Year Wealth Tax Paid 2003-04 13,47,557/- 2004-05 11,20,227/- 2005-06 13,55,765/-

(viii) No wealth tax is payable on 'stock-in-trade and, therefore,

had the land been treated/ held as 'stock in trade’ by the

assessee during the relevant years, the assessee would not have

been required to pay such huge wealth tax in the relevant years.

(ix) The aforesaid position is not at all disputed and the above

returns have also attained finality.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 3.01 The Ld. AR further submitted that the facts to

demonstrate that the Industrial Land was converted into

“stock in trade” in the financial year 2006-07 are as

under:-

(i) Object clause of the Memorandum of Association was

amended in September, 2005 to include 'real estate’ as one of the

main object vide clause (ii).

(ii) The approval of the shareholders was taken for amendment

of the Memorandum of Association and also for the

commencement of business of real estate under section 149(2A)

of the Companies Act, 1956.

(iii) In the audited financial statements for the relevant

Assessment Year 2007-08, the assessee had shown its results

separately for ‘real estate’.

(iv) Note given in Note 12 of Schedule O – Notes to Accounts

reads as under:-

“13. Segment information for the year ended 31st March, 2007

(a) Business Segments Based on the guiding principles given in Accounting Standard As-17 “Segment Reporting” issued by the Institute of Chartered Accountants of India, the Company’s business 8

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09

segments include Milk/Milk products (manufacture of dairy milk & milk products) & Real Estate”.

3.02 It was submitted that, thus, it is evident, that the

industrial land was held as capital asset till assessment year

2006-07; and that the industrial land was converted from capital

asset into stock-in-trade in assessment year 2007-08 only.

3.03 The Ld. AR drew our attention to the recent decision of

the Hon’ble Allahabad High Court in assessee’s own case for

assessment years 2003-04 to 2006-07 wherein the initiation of

reassessment proceedings for the said assessment years were

quashed holding that-

a) “there was complete disclosure of all material facts relating to land by the assessee during the course of assessment proceedings and there was no failure on the part of assessee to disclose fully and truly all the material facts necessary for the assessment-years under consideration; b) there was no conversion of capital asset into stock-in- trade nor such capital asset was treated as stock-in- trade of business during the years under consideration and that the assessing authority erred in invoking section 45(2) on sale of land by assessee. The HC further observed that to make the provisions of section 45(2) applicable, there must be positive act on the part of the owner of the capital asset to transfer the asset by way of conversion into stock-in-trade or treating such capital asset as stock-in- trade of a business.”

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 3.04 The Ld. AR further submitted that the Hon’ble High

Court had observed that the land was a long term capital asset in

the hands of the assessee during the financial years 2002-03 to

2005-06 and that, there was no conversion of the capital asset

into stock-in-trade under the provisions of section 45(2) of the Act

during such period as contemplated by the Revenue. As a result,

any gain/loss accruing as a result of transfer of land was to be

taxed as ‘Long Term Capital Gains’. The Ld. AR referred to the

relevant observations of the Hon’ble High Court as under:-

“32. Now coming to the question that whether, on the facts and circumstances, the provision of Section 45(2) of the Act is applicable. 33. Section 45(2), as referred hereinabove, provides the profit or gain arising from the transfer by way of conversion by the owner of the 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.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 into stock-in-trade of a business or owner has treated such capital asset as stock-n-trade of a business. To make the provision application, there must be a positive act on the part of the owner of the capital asset to transfer the asset by way of conversion into stock-in-trade or treating such capital asset as stock-in-trade of a business. In the absence of such a positive act on the part of the owner of the capital asset, the provision of Section 45(2) does not apply. In the present case, it is not the case of the revenue that the owner has transferred, by way of conversion of the capital asset, converted the capital asset into stock-in-trade or has treated such capital asset as stock-in-trade of a business. There is no such material in this regard on record. The assessing authority, while initiating the proceeding, under Section 148, read with Section 147, has inferred such conversion of capital asset into the stock-in-trade and applied the provision of Section 45 (2), which is wholly erroneous. ”

3.05 It was submitted that the fact that the land was held

by the assessee as “capital asset” till assessment year 2006-07

stands accepted by the Revenue, which has now attained finality.

Therefore, there could be no question of the very same land being

treated as having been converted into stock in trade in financial

year 2002-03, as alleged by the assessing officer, for the purpose

of computing capital gains during the year under consideration.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 3.06 It was further submitted that in the aforesaid decision,

the Hon’ble High Court has also recognized the fact that in order

to attract the provisions of section 45(2) of the Act, there must be

a positive act on the part of the owner of the capital asset to

transfer the asset by way of conversion into stock-in-trade or

treating such capital asset as stock-in-trade of a business. In the

absence of such a positive act on the part of the owner of the

capital asset, the provision of Section 45(2) does not apply. It was

submitted that there was no act on part of assessee to convert

land into stock-in-trade during the financial years 2002-03 to

2005-06. The land was shown as capital asset since beginning in

the books of accounts of the assessee. In financial year 2000-01,

the permission for converting the said land from ‘Industrial’ to

‘Residential’ was sought in order to sell the existing capital asset,

which does not mean that the assessee converted the land into

“stock in trade”. It was submitted that, thus, in view of the above,

the land was converted from capital asset to stock-in-trade only

during the year under consideration and not any time before that.

3.07 It was further submitted that the aforesaid contention

is supported by the clear language of section 45(2) of the Act,

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 since the precondition of that section is that either of the

following situation must exist:

a) capital asset held by the owner is converted by

him into stock in trade; or

b) capital asset is treated as stock in trade by the

owner.

3.08 It was further submitted that in both the aforesaid

situations, the emphasis is on the treatment given by the owner

of the capital asset. Thus, till the time the owner himself either

converts the capital asset into stock in trade or treats the capital

asset as stock in trade, the provisions of section 45(2) of the Act

are not at all attracted. The Ld. AR submitted that this contention

is fortified by use of the expression “conversion by the owner” and

“its treatment by him” in section 45(2) of the Act. The words “by

the owner” and “by him” clearly refer to a positive act on the part

of the owner of either converting his capital asset into stock in

trade or treating the same as such. The Ld. AR reiterated that for

section 45(2) to apply what is relevant and conclusive is the

conduct of the owner of the capital asset and nothing else. If the

assessee/owner has not converted/treated his capital asset into

as stock in trade in any particular year, then it will not be open to

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 the assessing officer to hold that the capital asset was, for the

purposes of tax under section 45(2) of the Act, treated as or

converted into stock in trade. Further, only the positive act/

conduct of the owner- assessee in converting/ treating the capital

asset into/as stock in trade is relevant to determine the

applicability of section 45(2) of the Act and nothing else.

3.09 The Ld. AR also invited the Bench’s attention to the

decision of the Mumbai Bench of the Tribunal in the case of

Jehangir T. Nagree: [2008] 23 SOT 512 (MUM) wherein the

Tribunal held that under section 45(2) of the Act it was the sweet

will of the assessee to decide as to when he intended to convert

his investment into stock in trade.

3.010 As regards the observations of the assessing officer,

and also affirmed by Ld. CIT(Appeals), that since the assessee had

applied for/ obtained permission from the Ghaziabad

Development Authority, Ghaziabad, for converting its industrial

land into residential land in the financial year 2002-03, the land

was to be treated as converted in the said financial year, the Ld.

AR submitted that the same cannot be the sole basis for holding

that the land was converted by the assessee from capital asset to

stock in trade in the financial year 2002-03. He submitted that

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 the conversion, in terms of section 45(2) of the Act, takes place

only when the assessee, by his voluntary act, converts/treats the

capital asset into stock in trade and not otherwise.

3.011 The Ld. AR further submitted that there may be many

instances where an assessee may seek permission from a

regulatory /development authority for change in the land use.

Therefore, seeking such change, by itself, cannot be the basis to

hold that the assessee changed the character of the land from

capital asset to stock in trade or vice-versa. It was submitted that

in the present case, the assessee sought permission for

converting its industrial land into residential land since the

assessee felt that it would be able to realize higher price for the

large piece of land, if the assessee sold such land as residential

plots rather than selling the entire land as industrial land to a

single buyer. It was further submitted that at the time when such

decision was taken, the assessee was a sick company and,

therefore, the aim of the ASC set up by the BIFR was to

take steps to realize higher consideration. It was not at

all the intention, at that time, to start new venture/

business of real estate.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 3.012 The Ld. AR also drew our attention invited to the

following decisions wherein the Courts have held that the mere

fact that the assessee took certain steps for selling bigger plot to

fetch higher price, including seeking relevant permissions, would

not mean that the gain realized was business income:

Deep Chandra and Co. v. CIT : 107 ITR 716 (All.)

CIT v. Kasturi Estates (P.) Ltd: 62 ITR 578 (Mad.)

CIT vs. MLM Mahalingam Chettiar: 107 ITR 236 (Mad.)

CIT vs. A. Mohammed Mohideen: 176 ITR 393 (Mad.)

CIT vs. Suresh Chand Goyal: 298 ITR 277 (MP)

Kaur Singh vs. CIT: 144 ITR 756(P&H)

Asha Housing Enterprises vs. DCIT: 127 ITD 94 (Bang.)

3.013 Our attention was also invited to the following

decisions wherein it has been held that to determine the nature of

an asset, one must look at the intention of an assessee at the

time of purchase of an asset-whether the same was to be held as

“capital asset” or as “stock-in-trade”:-

CIT v. Mohakapur Ice and Cold Storage: 281 ITR 354~(A1I.)

Bhogilal H. Patel v. CIT: 74 ITR692 (Bom.)

CIT v. Anandlal Becharlal & Co.: 107 ITR 677 (Bom.)

CIT v. B.K. Bhaumik: 245 ITR 614 (Del.) 16

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 Marudhar Hotels Pvt. Ltd. v. ACIT: ITA No. 75/Ju./2012

3.014 The Ld. AR submitted that in light of the aforesaid facts

and legal position and also applying the ratio of decision of the

Hon’ble Allahabad High Court in the assessee’s own case (supra),

the provisions of section 45(2) of the Act were not at all applicable

till the financial year relevant to the assessment year 2005-06. He

submitted that the assessing officer may, therefore, be directed to

accept the gains as declared in the return of income on the basis

of conversion of land in the financial year 2006-07, i.e. the year

under consideration.

3.10 On the issue of determination of Fair Market Value

of the industrial land as on 01.04.1981, the Ld. AR

submitted that the assessee had, while computing ‘long term

capital gains’, adopted Rs.190/- per sq. yard as fair market value

of the land on 01.04.1981. The said valuation of Rs.190/- per sq.

yd. was duly supported by the valuation report of the Government

registered valuer (available on pages 92-93 of the paper book).

It was submitted that the registered valuer determined the fair

value of the land at Rs.190/- per sq. yard as under:

(a) Valuer first took into account the circle rate of the land at

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 Rs. 100/- per sq. yard and fair value of the land at Rs. 115/-

per sq. yard;

(b) Thereafter, the valuer took into account the fact that out of

total land admeasuring 77,638 sq. yards, only land

admeasuring 46,232 sq. yards was saleable. Since saleable

area of land was less, to determine the true fair value for the

purpose of capital gains, the valuer determined the fair value of

the saleable area by appropriately increasing the fair value of

the saleable portion.

3.11 The Ld. AR submitted that the assessing officer rejected the

said valuation report of the registered valuer without any basis

and adopted the fair market value of the land at Rs.20/- per sq

yard as intimated by the U.P. State Industrial Development

Corporation (‘UPSIDC’), vide letter dated 17.12.2009, filed in

pursuance to the assessing officer’s notice under section 133(6)

of the Act (available at page 123 of the paper book).

3.12 It was further submitted that the Ld. CIT (A), however,

concluded that the fair market value of the land as on

01.04.1981 should be taken at Rs.100/- being the circle rate and

the Ld. CIT (A) did not accept the second step adopted by the

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 registered valuer in increasing the value of land on account of

lower saleable area.

3.13 It was submitted by the Ld. AR that on perusal of the

aforesaid letter of the UPSIDC, it would be seen that even though

the rate of industrial land has been mentioned at Rs.20/- per sq.

yard, yet it was clearly stated that the land allotted to the

assessee does not come under the purview of the industrial area

for which the said rate was mentioned. Furthermore, the land of

the assessee is a freehold land and in the above letter of the

UPSIDC, it has not at all been stated as whether the rate of

Rs.20/- per sq. yard is applicable for leasehold land or for

freehold land.

3.14 The Ld. AR further submitted that during the year

ended 30th June, 1985, the assessee had revalued the value of

land in the books of accounts on the basis of the report of an

approved valuer vide report dated 8th October, 1985, (available at

pages 94-122 of the paper book) wherein the valuer had valued

the land at Ghaziabad at Rs. 12,50,000/- per acre, i.e. Rs.258

per sq. yard. Thus, land having market value of Rs.258 per sq.

yard in 1984-85 could not be valued at Rs.20/- per sq. yard as

on 1.04.1981. The Ld. AR submitted that this fact also

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 substantiates the claim of the assessee that the value of land as

on 1.04.1981 was Rs. 190/- per sq. yard.

3.15 It was further submitted that in case the assessing

officer disagreed with the valuation done by the Registered

Valuer, he ought to have pointed out the discrepancies therein

and recorded the reasons for doing so. Reliance, in this regard,

was placed on the following decisions:

CWT vs Raghunath Singh Thakur: 304 ITR 268 (HP)

Sosamma Paulose vs JCIT: 79 TTJ 573 (Coch.)

Shanti Complex vs ITO: 63 ITD 181 (Pat.) (TM)

Chitra Publicity Company (P) Ltd. vs. ACIT: (2010) 127 TTJ

(Ahd) TM 1

ACIT vs Vinod Kumar Agarwal: 82 ITD 1 (Vishakapattnam)

Amit Estate Organizer vs ITO: 316 ITR (AT) 190

3.16 It was submitted that in the aforesaid circumstances,

particularly having regard to the valuation report furnished by

the registered valuer certifying the fair market value of the land

under consideration as on 1.4.1981 at Rs.190/-per sq. yard, it

was not open to the assessing officer to have disregarded the

same and adopted an altogether different rate of Rs.20/- per sq.

yard, that too on the basis of letter received from UPSIDC, which

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 was not at all relevant for the purpose of determining the fair

market value of the land under consideration.

3.2 During the course of hearing on an earlier occasion,

this Bench had directed the assessee to furnish documentary

evidences in support of the contention that the assessee had

transferred the portion of land comprising of open spaces, parks,

public utility areas, etc without any consideration as per clause

(V) of the agreement dated 03/08/2002.

3.21 In this regard the assessee sought to place on record

additional evidences to substantiate the averment of the assessee

that the saleable area of the land was approved at 43,425 sq.

yards (later 43,418 sq. yards) and therefore, the fair market value

of land as on 01/04/1981 should proportionately be enhanced

and determined at Rs. 190/- per square yard. The Ld. AR

submitted an application for admission of additional evidences in

terms of Rule 29 of the Income Tax (Appellate Tribunal) Rules,

1963 and sought to place on record the following documents by

way of additional evidences –

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 1. Copy of affidavit of the director of the assessee along with letter dated 28/07/2007 filed by the assessee before the Ghaziabad Development Authority (GDA) for issuance of completion certificate.

3.22 The Ld. authorised representative submitted that the

assessee had adopted the fair market value at Rs. 190/- per

square yard relying on the valuation report wherein the circle rate

of Rs. 100/- per square yard was extrapolated in relation to the

saleable area. It was submitted that such extrapolation is correct

and necessary considering that out of total area of 77,638 yd.²,

the GDA granted approval for sale to the extent of 43,425 yd.²

(later revised to 43,418 yd.²) and the remaining land to the extent

of 34,213 yd.² (later revised to 33,794 yd.²) occupied by parks,

roads, pavements, drains, water supply system and other public 22

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 utility services which were to be transferred to the GDA without

consideration. The Ld. AR submitted that the additional evidences

are being placed to substantiate the averment of the assessee that

the saleable area of land was approved at 43,425 yd.² (later

43,418 yd.²) and therefore, the fair market value of land as on

01/04/1981 should be proportionately enhanced and determined

at Rs. 190/- per square yard. It was further submitted that this

fact was brought to the knowledge of the AO vide letter dated

23/12/2009 and the AO as well as the Ld. CIT (Appeals) had

never disputed the fact that out of total area, the saleable area

was only 43,425 yd.². It was submitted that this was evident from

the fact that the AO, while computing capital gains, took into

consideration the saleable area of 43,425 yd.², as was evident

from pages 7 and 8 of the assessment order. It was further

submitted that the assessee was never directed to produce these

aforesaid additional evidences either by the AO or by the Ld. CIT

(Appeals) and the issue of saleable area was never disputed. It

was further submitted that the issue of transfer as per clause (V)

was also never raised by the assessing officer or the Ld. CIT

(Appeals) and, therefore, these additional evidences were being

furnished only to address and clarify the specific query raised by

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 the Bench during the course of hearing. It was further submitted

that these additional evidences may be admitted and taken into

consideration for the disposal of the appeals.

on the orders of the authorities below and read out extensively

from both the orders while vehemently arguing that the same

should be upheld.

the relevant material on record. The first issue that arises for

consideration is whether the industrial land held by the assessee

was converted into stock-in-trade on 1st April 2002 (as held by

the Assessing Officer) or on 1st April 2006 (as contended by the

assessee). In this regard, the following facts remain undisputed:-

1940-41 and it housed Ghaziabad Vanaspati unit of the

assessee. Thus, the land was initially not acquired for

sale but was held as a capital asset.

scheme framed by the BIFR and the sale consideration

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 was to be used to fund the cost of rehabilitation scheme

and repayment of loan.

land sold by the assessee was being shown under capital

assets in the schedule of fixed assets.

assessment years 2003-04 to 2006-07 show that the land

at Ghaziabad was shown as a taxable asset and wealth

tax was paid thereon.

amended in September, 2005 to include real estate as

one of the main objects.

the first time, showed the financial results separately for

real estate.

5.1 These above facts demonstrate that the industrial land was

held as capital asset till assessment year 2006-07 and the

industrial land was converted into stock-in-trade in the financial

year 2006-07 and not 2002-03 as held by the Assessing Officer.

Further, the Hon’ble Allahabad High Court in assessee’s own

case in Tax Writ Nos. 47 to 50 of 2010 in the case of Amrit

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 Corporation Ltd. vs ACIT reported in 275 CTR 174 (All) has also

held in assessee’s favour by impliedly holding that the transfer

for the purpose of capital gains did not take place in the year

2002-03. Although this judgment of the Hon’ble Allahabad High

Court was rendered in respect of validity of reassessment

proceedings, the Hon’ble High Court did hold in Para 33 and 34

of the order as under:-

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 positive act on the part of the owner of the capital asset, the provision of Section 45(2) does not apply. In the present case, it is not the case of the revenue that the owner has transferred, by way of conversion of the capital asset, converted the capital asset into stock-in-trade or has treated such capital asset as stock-in-trade of a business. There is no such material in this regard on record. The assessing authority, while initiating the proceeding, under Section 148, read with Section 147, has inferred such conversion of capital asset into the stock-in-trade and applied the provision of Section 45 (2), which is wholly erroneous. ”

5.2 This adjudication by the Hon’ble High Court goes in

favour of the assessee that there was no conversion of the capital

asset to stock-in-trade in financial year 2002-03 as has been

contended by the department and that the provisions of section

45(2) will apply only in a situation where there is a transfer by

way of conversion by the owner of the capital asset into stock-in-

trade by a positive act on the part of the owner of the capital

asset and that in absence of such a positive act on the part of the

owner of the capital asset, the provisions of section 45(2) will not

apply. The Hon’ble High Court also concluded that in the present

case, it was not the case of the assessee that the owner had

transferred, by way of conversion of the capital asset, converted

the capital asset into stock-in-trade or had treated such capital 27

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 asset as stock-in-trade of the business. Thus, the Hon’ble High

Court has adjudicated that the land was a long term capital asset

in the hands of the assessee during the financial years 2002-03

to 2005-06 and that there was no conversion of capital asset into

stock-in-trade under the provisions of section 45(2) of the Act

during such period as contemplated by the revenue.

5.4 Therefore, on count also, there can be no question of

the very same land being treated as having been converted into

stock-in-trade in financial year 2002-03, as contended by the

department, for the purpose of computation of capital gains

during the year under consideration.

5.5 Further, the Hon’ble Court has also recognized the fact

that in order to attract provisions of section 45(2) of the Act,

there must be some positive act on the part of the owner of the

capital asset to transfer the asset by way of conversion into

stock-in-trade or treating such capital asset as stock-in-trade of

the business. It is amply clear that in absence of a positive act

on the part of the owner of the capital asset, the provisions of

section 45(2) will not apply.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 5.6 It is undisputed that there was no act on the part of

the assessee to convert such land into stock-in-trade during the

financial years 2002-03 to 2005-06 and the land was shown as

capital asset since the beginning in the books of accounts of the

assessee. It was only in financial year 2000-01 that the assessee

had sought permission for converting the said land from

industrial to residential but this does not imply that the assessee

had converted the land into stock-in-trade during the financial

year 2000-01. We find merit in the contention of the assessee

that the land was converted from capital asset to stock-in-trade

only during the year under consideration i.e. FY 2006-07 and not

any time before that, because the language of section 45(2) of the

Act provides that capital asset held by the owner is converted by

him into stock-in-trade or capital asset is treated as stock-in-

trade by the owner and in both the situations, the emphasis is on

the treatment given by the owner of the capital asset. Thus, till

the time the owner himself either converts the capital asset into

stock-in-trade, the provisions of section 45(2) of the Act will not

be attracted. Thus, what is provided is that only positive

act/conduct of the owner assessee in applying/treating a capital

asset into stock-in-trade is relevant to determine the applicability

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 of section 45(2) of the Act and nothing else and this aspect has

been approved by the Hon’ble High Court in the assessee’s case

referred to above.

5.6 We also agree with the assessee’s contention that since

the assessee had applied for obtaining permission from the

Ghaziabad Development Authority (GDA), Ghaziabad for

conversion of industrial land into residential land during

financial year 2002-03, the land cannot be treated as converted

in the financial year 2002-03 as in terms of section 45(2) of the

Act, the conversion takes place only by the voluntary act of the

assessee for such conversion and a mere act of seeking

permission for conversion of land use will not come within the

definition of ‘transfer’.

5.7 Therefore, on an overall consideration of the facts, we

hold that the industrial land was held as capital asset till

assessment year 2007-08 and the same was converted into

stock-in-trade only in the financial year 2006-07 and not in

assessment year 2003-04 as contended by the department.

Accordingly, ground nos. 1, 1.1 and 1.2 in assessee’s appeal for

assessment year 2007-08 and ground nos. 1, 1.1 and 1.2 for

assessment year 2008-09 stand allowed. 30

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 5.8 The second issue arising for our consideration is the

determination of Fair Market Value of the land on 1st April, 1981.

The assessee had claimed Fair Market Value at Rs. 190/- per sq

yard. The assessee had relied on the valuation report of a

registered Valuer in arriving at the Fair Market Value. However,

the Assessing Officer had rejected the valuation report and had

adopted the Fair Market Value of land at Rs. 20/- per sq yard as

intimated by UPSIDC filed in pursuance of notice u/s section

133(6) of the Act. On appeal, the Ld. CIT (A) determined the Fair

Market Value at Rs. 100/- per sq yd according to the existing

circle rate and now department is contesting the valuation at Rs.

100/- per sq. Yard in place of Rs. 20/- per sq. yard whereas the

assessee is challenging the valuation of Fair Market Value at Rs.

100/- per sq yd instead of Rs. 190/- as claimed by the assessee.

5.9 It is seen that the assessee wanted to adopt the Fair

Market Value @Rs. 190/- per sq yd based on the fact that out of

the total land measuring 77,638 sq yards, the saleable land area

was only 46,232 sq yards in terms of clause (iv) of the agreement

made between the assessee and the GDA vide agreement dated

3rd August 2002 wherein certain area was to be transferred from

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 the assessee to the GDA free of cost. The relevant clause (iv)

reads as under:-

“that the first party shall transfer ownership of parks,

roads, pavements, drains, water supply system and public

utility services, if any, and the land underneath without

consideration of money in favour of the authority or as

directed by the party”.

5.10 It is the assessee’s contention that since the saleable

area of land was less, the Fair Market Value of the saleable

portion had to be appropriately increased so as to determine the

true Fair Market Value for the purpose of computation of capital

gains. The assessee’s claim is duly supported by the report of the

registered valuer. However, the department did not accept the

assessee’s computation of Fair Market Value at an increased

value so as to factor the decrease in the saleable area. The

Assessing Officer adopted value of Rs. 20/- per sq yd which the

Ld. CIT (A) himself has rejected on the ground that the value of

Rs. 20/- per sq yd as intimated by the UPSIDC was not

applicable to the assessee’s case as the assessee’s land did not

fall under the UPSIDC area. We find no reason to interfere with

the findings of the Ld. CIT (A) in this regard as this finding is duly 32

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 supported by letter from the UPSIDC dated 17.12.2009

addressed to the ACIT, Ghaziabad which mentions that the

assessee’s land did not come under the jurisdiction of the

UPSIDC. Thus, the sole ground in department’s appeals in both

the years stands dismissed.

5.11 The next issue for consideration is whether the figure

of Rs. 100/- sq yd, being the circle rate, as adopted by the ld. CIT

(A) is to be sustained or the value of Rs. 190/- per sq yd, as

contended by the assessee, is to be applied for the purpose of

computation of long term capital gain. In our considered opinion,

the assessee has a strong case for adopting a higher Fair Market

Value given the fact that the total area measuring 77,638 had a

saleable area of only 46,232 sq yds. The assessee had to

essentially provide for parks, roads, pavements, drains, water

supply system and public utility services free of cost to the GDA

and as such, the reduction in saleable area would have to be

necessarily factored into the Fair Market Value. Therefore, in

principle, we do agree with the assessee’s contention that the

Fair Market Value should be appropriately enhanced so as to

offset the reduction in the total saleable area.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 5.12 The Bench had raised a query and had asked the Ld.

AR to demonstrate before the Bench that the transfer ownership

of the areas/facilities as contemplated in clause (iv) of the

agreement with GDA had actually taken place and the Ld. AR has

filed an application for admission of additional evidence in terms

of Rule 29 of the ITAT Rules, 1963 in this regard and we deem it

fit to admit the same. The Ld. AR has placed on record an

affidavit from the Chairman and MD of the assessee company

stating that under the terms of the agreement, the assessee

company did not have any right over parks, roads, pavements,

drains, water supply system, public utility services etc. i.e. the

common areas and facilities and these were to be transferred to

the local body free of cost. It has also been averred in the said

affidavit that in terms of the agreement, the assessee company

was neither entitled to receive any consideration nor has received

any consideration in respect of said common areas and facilities

and that the residents of the township have the right to use these

common areas and facilities. It has further been averred in the

affidavit that the assessee had applied for issuance of completion

certificate before the authority vide letter dated 20th July 2007

but the same had not been granted till date. It has also been

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 averred that as per section 15A of the UP Urban Planning and

Development Act 1973, if the authority fails either to grant or

refuses to grant completion certificate within three months of

submission of completion notice, the completion certificate is

deemed to have been granted by the authority. The Ld. AR has

also placed on record letter dated 20th July 2007 addressed to the

GDA as aforesaid along with copy of plans. Ld. AR has also

placed on record copy of communication dated 25.9.2012

wherein the GDA has informed the assessee that the assessee is

still to transfer open areas, road, parks etc. to Ghaziabad Nagar

Nigam free of cost. The Ld. AR has also placed on record a copy

of letter dated 5th October, 2012 addressed to GDA again

requesting for the issuance of completion certificate.

5.13 A perusal of these documents reveals that although

the assessee has duly been following up the matter pertaining to

the issuance of completion certificate, the transfer of ownership

of the open areas/facilities in terms of clause (iv) of the

agreement is still not complete as per the letter dated 25.09.2012

issued by the GDA. It is also pertinent that these additional

evidences filed by the assessee have not been examined by the

lower authorities. Therefore, while we do agree with the

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 assessee’s contention that the Fair Market Value as on 1.4.1981

should be enhanced so as to include the cost of unsaleable area

in terms of open space/facilities etc., the issue will necessarily

have to be decided by the Assessing Officer after duly considering

the valuation report submitted by the assessee supporting the

Fair Market Value of Rs. 190/- per sq yd as neither the Assessing

Officer nor the Ld. CIT (A) have commented upon the same. We

also hold that should the assessee be able to demonstrate before

the Assessing Officer that the transfer of ownership of unsaleable

area has taken place, as contemplated in clause (iv) of the

agreement, the assessee should be allowed due weightage of the

same while computing the market value of the same as on

1.4.1981. Accordingly, ground nos. 2, 2.1 and 2.2 for both the

years in assessee’s appeal stand allowed for statistical purposes.

allowed in terms of our directions as aforesaid and both the

appeals of the department are dismissed.

I.T.A. No. 1789, 4579, 5337, 2163/Del/2011 Assessment years: 2007-08, 2008-09 Order is pronounced in the open court on 6th June, 2017.

Sd/- Sd/- (S.V. MEHROTRA) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEMBER

Dated: 6th June, 2017 ‘GS’