Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’ KOLKATA
Before: Shri J. Sudhakar Reddy, AM & Shri S.S. Viswanethra Ravi, JM]
order May 18, 2018 ORDER Per J. Sudhakar Reddy, AM Both these appeals are filed by the revenue and are directed against separate orders of CIT (Appeals) – XII, Kolkata dated 30.09.2013 for the Assessment Years 2008-09 & 2010-11 under section 143(3) of the Income Tax Act, 1961 (‘the Act’). As the issues arising in both the appeals are common, for the sale of convenience, they are heard together and disposed off by way of this common order.
Facts in brief. The assessee, M/s. Poddar Projects Ltd., and is in the business of letting out of property, manufacturing of cotton yarn, export of C.I. materials. The facts relating to the first issue before us i.e. whether the income arising out sale of space is to be assessed
2 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. under the head long term capital gain or under the head business income are brought out by the Ld. CIT(A) at para 5.2.1 and 5.2.2 of his order: “5.2.1 The facts of the case in brief are as follow. The appellant company was engaged in letting out of property, manufacture of cotton yarn, export of C.I. Materials. The Assessing Officer, during the course of assessment proceedings, observed that as per the tax audit report, there was no export of C.I. Materials and manufacture of cotton yarn during the year. The Assessing Officer noticed that this year i.e. in F.Y. 2007-08, the assessee converted 6049 sft. Of space in the building viz. Poddar Court at 18, Rabindra Sarani, Kolkata, as stock in trade and sold 5707 sft. Out of the said converted portion. The sales were made as under: S. No. Name of the party to whom sold Sft. Sale value 1. Dilip Kumar Gupta & 204 4,08,000 Madhumita Gupta 2. Kumban Das Mumdra (HUF) 204 4,08,000 3. Mohit Carriers Pvt. Ltd. 2783 69,57,500 4. Vivek Bajaj 933 18,66,000 5. Ashutosh Bajaj 932 18,64,000 6. Bijay Kr. Agarwal & Meena 651 16,27,500 Agarwal Total 5707 1,31,31,000
The Assessing Officer further found that as against the above conversion of space measuring 6049 sft., the appellant calculated the cost as under:
Cost of land Rs. 365374/- Cost of building Rs. 318466/- Total Rs. 683840/-
While calculating the cost of building of Rs. 3,18,466/-, the appellant deducted depreciation of Rs.2,41,425/- from the total cost of space of 6049 sft. Of Rs.5,59,891/-. The cost of building measuring 5707 sft. has been determined by the appellant at Rs. 6,45,177/- and thus, net profit on sale of space amounting to Rs.1,24,85,823/- [i.e. Rs.1,31,31,000/- - Rs.6,45,177/-] has been shown. The Assessing Officer noted that instead of showing the profit on sale of space as capital gains, the appellant claimed it as business income. According to him, since the assessee used the property at “Poddar Court” for the purpose of letting out and earning house property income from the very beginning and not shown it as any 3 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. business asset or stock in trade, the sale of space made during this year should have been shown as income from Long Term Capital Gains instead of Business Income.
Further, on examination of the sale deeds, the Assessing Officer found that the Registration Authority determined the fair market value of the property @ Rs. 6100/- per sft. Except in the case of sale made to M/s. Mohit Carriers Pvt. Ltd. where the value was adopted at the rate of Rs. 6,026/- per sft. By the Registrar., whereas the sales of the space were made by the appellant company at the rate of Rs. 2500/- per sft. In the case of Mohit Carriers Pvt. Ltd. & Bijay Kr. Agarwal & Meena Agarwal, while in respect of the other cases the spaces were sold at the rate of Rs. 2000/- per sft.
5.2.2. In view of the above observations, the Assessing Officer asked the appellant to show cause as to why the conversion of 6049 sft. Of space into stock in trade should not be rejected and why not the profit arising out of the sale of a portion of space should not be treated as income from capital gains. It was also asked to show cause as to why the fair market value determined by the registrar should not be treated as consideration price received against the sales made to 6 purchasers as mentioned above and why the long term capital gains should not be computed as per the provisions of section 50C of the I.T. Act. The explanation offered by the appellant in respect of the two issues was in the following terms:
(i) Regarding conversion of fixed assets to stock-in-trade: The appellant’s submission was that the conversion of fixed asset into stock in trade was always permissible in law but provisions of section 45(2) is applicable. In the circumstances, the view that conversion of a portion of building space at Poddar Court into stock in trade was afterthought and to avoid the provision of section 50C of the Act cannot be equated as a reasonable conclusion. According to the appellant, there was no provision in the Act which approved the proposed rejection of conversion of fixed assets to stock in trade.
(ii) Regarding applicability of section 50C of the I.T. Act: The appellant submitted that the proposition to substitute the stamp value fixed by the stamp valuation authority in place at actual sale consideration and thereby determining capital gain would be erroneous. The provisions of section 50C which authorizes such substitution, according to the 4 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. appellant, was applicable only where there is transfer of capital asset being land or building or both. Section 2(14) which defines ‘capital asset’ excludes from its purview ‘any stock in trade, consumable stores or raw materials held for the purpose of business or profession’. It was thus submitted that the provision of section 50C of the act were not in any way attracted to the facts of the present case.”
The Assessing Officer held that the income in question was taxable as long term capital gain and that provisions of section 50C is applicable for the following reasons: a. The assessee has been showing income from the building all along as income from house property. b. This property was shown as a capital asset and was never shown as a business asset. The assessee has never claimed any depreciation on this property. c. During the Financial Year 2005-06 relevant to Assessment Year 2006- 07, for the first time the assessee converted a portion of the property as stock-in-trade. No part of this converted property was sold during the year. d. The assessee had never engaged in the business of real estate or purchase and sale of immovable property. The assessee claimed to have converted certain portions of the premises, as stock-in-trade, but the auditor in his tax audit report in Sr. No. 28(a) mentioned the opening stock purchase, sale and closing stock as Nil. Hence the claim is not certified by the auditor. (e) In the schedule of depreciation, it is seen that the assessee has not claimed any depreciation on the building. (f) The assessee had converted a part of the building as stock-in-trade only when the tenants surrendered the tenancy rights. This is nothing but an afterthought to avoid applicability of provisions of section 50C.
Aggrieved the assessee carried the matter in appeal. The First Appellate Authority granted relief. Aggrieved the revenue before us on the following revised grounds of appeal for A.Y. 2008-09: i. That on the facts and circumstances of the case Ld. CIT(A) erred in allowing the capital gain and business loss as computing by the assessee without appreciating the findings of the A.O.
5 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. ii. That on the facts and circumstances of the case Ld. CIT(A) erred in directing to accept the capital gains and business loss as declared by the appellant under section 45(2) of the Act. However, the Assessing Officer has treated the income arising out of sale of space as long term capital gain. iii. That on the facts and circumstances of the case Ld. CIT(A) erred in directing to accept the capital gains and business loss as declared by the appellant under section 45(2) of the Act. However, the facts of the case is that the assessee has neither shown any capital gain on sale of office space in Poddar Court building nor claimed any business losses in the return of income filed u/s 139(1) of the I.T. Act, 1961. Even during the course of assessment proceedings, the assessee has never filed any computation of Capital Gains and Business Losses u/s 45(2) of the I.T. Act. iv. That on the facts and circumstances of the case the A.O. has rightly computed the sale consideration by adopting the provision of Section 50C of the I.T. Act, 1961 at Rs. 3,47,03,062/- to arrive at the Long Term Capital Gain of Rs. 3,37,48,776/-.”
We have heard the learned DR as well as the learned AR at length. We have considered the material on record as well as the case law cited. On a careful consideration on the facts and circumstances of the case and the perusal of the papers on record as well as the orders of the authorities below, we hold as follows. The assessee had converted 21494 sq.ft. of building space into stock-in-trade on 1st April, 2005 at a cost of Rs. 25,55,154/-. This fact was reflected in the final accounts of the assessee for the year ended 31.03.2006 relevant to the Asst. Year 2006-07. Copy of the audited balance sheet as on 31.03.2006 relevant to the Financial Year 2005-06 was produced as evidence before the lower authorities. Out of the building space 21,494 sq.ft., an area of 6633 sq.ft. was sold during the financial year 2006-07 relevant to the assessment year 2007-08. As on 01.04.2007, the opening stock of land in building was 14,861 sq.ft. During the assessment year 2008-09, the assessee company sold 5,707 sq.ft. of 6 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. area building at a consideration of Rs. 1,31,31,000/-. The assessee has further converted 6049 sq.ft. of building space, as stock of building space for the year ending 31.03.2008 relevant to the F.Y. 2007-08. The closing stock as on 31.03.2008 was 15,203/- sq.ft. For the financial year 2009-10, the assessee sold from its stock of land of 15,203 sq.ft. in building, an area of 11542 sq.ft.
At the time of conversion of land and building from capital asset to stock-in-trade, the assessee obtained a report from registered valuer and converted the stock at the rate mentioned. Copy of the valuation report placed on record. The undisputed fact of the case is that, the sale of building space during the assessment year 2008-09 as well as assessment year 2010-11, was out of the opening stock of land and building. On these facts the issue to be determined is whether the directions of the Ld. CIT(A) to treat the profit on sale of building space as long term capital gain, for the period upto the date of conversion of capital asset as stock in trade and as business income thereafter, under the provisions of section 45(2) of the Act correct or not.
The Ld. CIT(A) held that the capital gain arising from such a conversion of capital asset into stock-in-trade shall be charged to capital gain tax in the year in which the closing stock in question is actually sold and for this purpose indexation of cost of acquisition shall be done till the date of conversion. The fair market value of the asset as on the date of conversion shall be considered as the full value of consideration received for the purpose of computing quantum of capital gain by applying provisions of section 45(2) of the Act.
7 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. 8. The business income is also to be calculated in the year of sale of such asset and such fair market value, which is taken as sale consideration for computing capital gain, would become the cost of the stock-in-trade and the difference between such cost and the sale proceeds received or accrued shall be treated as business income / loss of the assessee.
At page 18 and 19, he hold as follows: “Now, reverting to the facts of the present case, it may be seen that the sales of space in Poddar Court building of 5707 sq.ft. during the financial year relevant for assessment year 2008-09 has been effected out of the space converted into stock-in-trade during the financial year 2005-06. The copies of the audited statements of account furnished by the appellant support the submissions of the appellant. Now, whether such a conversion was permissible under the law in the case of the appellant, who is not a dealer is real estate and who has all along been deriving income from investment is clear from overriding provisions of section 45(2) of the Act and the ratio laid down in the case above cited by the Hon’ble ITAT, Mumbai. The decision of the Madras High Court in the case of CIT vs N.S.S. Investments (P) Ltd. reported (2005) 277 ITR 149(Mad) relied upon by the Assessing Officer dealt with sections 28 and 45 and where the case of the assessee was that it dealt with only investment in shares and not trading. The Hon’ble Madras High Court held that the finding of fact recorded in the order of the Tribunal is that the shares in question were never treated by the assessee as stock-in-trade and they were held for earning dividend only. A company can hold some share as stock-in-trade for the purpose of buying and selling of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee’s capital and not as stock-in-trade. Hence, there would be capital gains and not business income. The Hon’ble Court held that Tribunal is right in law in holding that the profit on sale of such shares is to be treated as capital gains instead of as business income as adopted by the Assessing Officer. Thus, it may be seen that the Hon’ble Court rejected the case of the Assessing Officer that it was business income. The reported case did not deal with conversion of investment into stock-in-trade. Therefore, that case is not at all applicable to the facts of the present case to hold that the case of the appellant of conversion of 8 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. part of investment into stock-in-trade is not permissible under the law. On the other hand, the ratio laid down in the judgment supports the case of the appellant. Therefore, having regarding to the facts and circumstances of the case, I am of the considered view that provisions of section 45(2) of the Act applied in this case. The appellant has also correctly disclosed capital gains on the conversion of the investment into stock-in-trade in the assessment year under consideration adopting the cost of acquisition as on 01.04.2005 i.e., the year in which such asset had been converted into stock-in-trade particularly when such cost as worked out by the appellant is supported by the reports of approved chartered valuers for the purpose.
Now, coming to the working of the business income/loss on the sale of space, since this is a case of sale of stock-in-trade and the same is outside the purview of the capital asset under section 2(47) of the Act, provisions of section 50C of the Act cannot be invoked. The appellant was, therefore, justified in working out the business loss by deducting the market value at the date of conversion into stock-in-trade from the actual sale consideration as per sale deeds. This is supported by the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs Groz-Beckert Saboo Ltd. (1979) 116 ITR 125 (SC). Where an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost to the assessee. In the reported case, the cases of CIT vs Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) and CIT vs Hantapara Tea Co. Ltd. (1973) 89 ITR 258 (SC) were also relied on. Therefore, keeping in view the facts of the case, the Assessing Officer was not justified in working out business income by adopting the fair market value of the space sold in Poddar Court building invoking provisions of section 50C after deducting therefrom the cost of acquisition as on 01.04.1996. The Assessing Officer is directed to accept the capital gains and business loss as declared by the appellant under section 45(2) of the Act. These grounds of appeal are accordingly allowed.”
10. We find no infirmity in these findings of the Ld. First Appellate Authority. The decision is in line the judgement of the Special Bench of the Tribunal in the case of Octavius Steel & Co. Ltd. vs Assistant Commissioner of Income Tax 2002, 83 ITD 87 Kolkata. In our view the direction of the Ld. CIT(A) are in accordance with the provisions of 9 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. section 45(2) of the Act. Moreover, for the assessment year 2007-08, the Assessing Officer passed an order of section 143(3) of the Act accepting the claim of the assessee. Hence applying the principle of consistency, the order of the Ld. First Appellate Authority has to be upheld on this issue.
11. As we have held that what was sold, was stock-in-trade and hence assessable under the head business income, the provisions of section 50C of the Act will not apply for the impugned assessment years. Hence this finding of the Ld. CIT(A) is also upheld. Thus the ground of revenue in these appeals for the assessment year 2008-09 is dismissed.
12. Coming to the appeal for the assessment year 2009-10, we find that ground no 1 and 2 are on the same issue as to whether, the profits earned on sale of building space, is assessable under the head income from business or under the head capital gain. As the facts are identical with the facts of the case for the assessment year 2008-09, consistent with the view taken by us for the assessment year 2008- 09, we dismiss these grounds in the revenue’s appeal.
13. The second issue that arises are adjudication for the assessment year 2010-11 is whether the Ld. CIT(A) was right in allowing “speculation loss” of Rs. 3,17,26,872/- as trading loss of the assessee. The loss in question was incurred by the assessee on future trading in forex. The Ld. CIT(A) referred to the CBDT instruction no 3/2010 dated 23.03.2010 reported in Taxman (ST) page 160 and 162 and held that the loss is allowable as business loss. We find that this order
10 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd. of the First Appellate Authority is in line with the principles of law laid down by Mumbai ‘I’ Bench of Tribunal in ITA No.4798/Mum/2012 Assessment Year 2009-10 in the case of IVF Advisors Pvt. Ltd. vs ACIT order dated 13.02.2015, wherein at para 7.5 held as follows: “To sum up, the derivatives include foreign currency and call option/put option, are transaction of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed.”
Similar is the decision of the Agra Bench of the ITAT in the case of Nand Nandan Agrawal vs DCIT 2018(2) TMI – ITAT Agra and the decision of the Chennai Bench of the ITAT in the case of DCIT vs Paterson Securities (P) Ltd. 127 ITD 386 (Chennai). Hence this grounds taken by the revenue on the deletion of disallowance of loss incurred on future trading of foreign exchange by the Ld. CIT(A) is hereby dismissed.
In the result, the appeals of the Revenue, for both the assessment years, are hereby dismissed.
Order Pronounced in the Open Court on 18th May, 2018.