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Income Tax Appellate Tribunal, “A” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 22.3.2016 passed by the Principal CIT-12, Mumbai u/s. 263 of the Act revising the assessment order passed by the Assessing Officer u/s. 143(3) of the Act for A.Y. 2011-12. The assessee is challenging the validity of revision order passed by learned Principal CIT.
The assessee-company is engaged in the business of manufacture and sale of agricultural equipments and development of real estate and hotel business. The assessment for A.Y. 2011-12 was completed by the Assessing Officer on 13.3.2014 u/s. 143(3) of the Act determining the total income of the assessee at ` 3.29 crores. The Learned Principal CIT revised the order u/s. 263 of the Act by holding that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of revenue.
2 M/s. American Spring & Pressing Works Pvt. Ltd.
Facts that led the Ld Principal CIT to revise the assessment order are discussed in brief. During the year under consideration, the Balance sheet sheet of the assessee disclosed “capital reserve on revaluation of land a/c” in the liability side with a balance of ` 187.08 crores and corresponding amount was shown in the asset side as “inventory of residential land”. During the course of assessment proceedings, the assessee explained the nature of these entries. It was submitted that the assessee is having land area of 38322.45 square meters. After excluding compulsory set back area etc., land admeasuring 37181.10 square meters was available for development. Out of the same, 8126 square meters was earmarked for the proposed hotel building and 29055.10 square meters was allocated for development of residential complex. It was submitted that the land was held by the assessee as a capital asset in the earlier years and the same was converted into stock in trade from 1.4.2010. On such conversion, land was revalued and the surplus amount was credited to the capital reserve account by revising the value of land “inventory”.
The assessee also entered into an agreement with M/s. Sashwat Construwell Pvt. Ltd. on 16.4.2010 for development of a residential complex on the above said land, which was converted into stock in trade. As per the agreement, the assessee is eligible to get 51% saleable area from the developer. Further TDR (transferrable development rights) could be purchased and loaded on the property which would increase permissible FSI consumption, on which also the assessee had 51% right. The assessee’s case before the AO was that no tax liability would arise on revaluation of cost of land and also upon entering into development agreement in respect of stock in trade. The AO completed the assessment accepting the explanations of the assessee.
5. However, Learned Principal CIT took the view that the assessee is liable to pay capital gain tax on conversion of capital asset into stock in trade, since the transfer has been completed upon entering into development agreement. According to Ld Principal CIT, the assessing officer has not properly examined
3 M/s. American Spring & Pressing Works Pvt. Ltd. this issue in accordance with the law. The Ld Principal CIT further noticed that the assessee has donated a sum of Rs.70.00 lakhs to M/s ASPEE Agricultural Research and Development Foundation and claimed weighted deduction u/s 35(1)(ii) of the Act at Rs.1,22,50,000/-. The Ld Principal CIT noticed that the assessing officer has allowed the said claim without examining the compliance of conditions prescribed u/s 35(1)(ii) of the Act. In view of the foregoing, the Ld Principal CIT took the view that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, he issued show cause notice u/s 263 of the Act proposing to revise the assessment order.
6. Before learned Principal CIT, the assessee contended that it is not liable to pay tax in the year of conversion of an asset into stock in trade as per the provisions of section 45(2) of the Act and it shall be liable to pay tax only when the asset was sold. Before learned Principal CIT, the assessee also furnished two valuation reports determining the value of land as on 1.4.1981 and as on 1.4.2010. The first valuation report was obtained for the purpose of determining fair market value as on 1.4.1981 for the purpose of computing capital gain. The second valuation report was obtained for the purpose of determining fair market value as on the date of conversion for valuing the stock in trade. The assessee also furnished a copy of the development agreement dated 10.4.2010 entered with M/s. Sashwat Construwell Pvt. Ltd.
Learned Principal CIT noticed that the assessee itself has revalued the asset as on 1.4.2010 i.e. the date on which the capital asset was converted into stock in trade. Further the assessee itself has obtained valuation report to determine fair market value as on 1.4.1981. The learned Principal CIT took the view that the transfer has been completed immediately upon entering into development agreement. In this regard, he relied upon the provisions of section 2(47)(v) of the Act and also decision rendered by Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (260 ITR 491).
4 M/s. American Spring & Pressing Works Pvt. Ltd.
Accordingly, he took the view that the assessee would be liable to pay capital gains tax since the necessary events making the assessee liable have occurred during the year under consideration, viz., (a) conversion of capital asset into stock in trade and (b) transfer of such asset has been completed as per the provisions of sec. 2(47)(v) of the Act.
The assessee contended before learned Principal CIT that it has given all the details before the Assessing Officer, on which the Assessing Officer has applied his mind and accepted that no capital gain would arise during the year under consideration. Accordingly it was contended that the AO has taken a possible view of the matter. Further, as per the development agreement, the developer would bring TDR in order to increase the FSI. Since the assessee was getting 51% of the aggregate saleable area, it was contended before Ld Principal CIT that the cost of TDR is indeterminable in its hands and hence no capital gain would be chargeable. However, learned Principal CIT observed as under with regard to various submissions of the assessee:-
“While it is true that the Assessing Officer appears to have sought an explanation with reference to the chargeability of capital gain on conversion of capital asset into stock in trade, the reply given by the assessee at that point of time is almost similar to the reply given during the present proceedings and seems to skirt around the issue and perhaps deliberately fails to address it. The Assessing Officer has accepted the response of the assessee, which is devoid of not only merit but also logic mechanically without any application of mind and in complete disregard the relevant statutory provisions and the applicable judicial decisions. The conduct of the Assessing Officer in accepting patently absurd explanations, which are irrefutably irrelevant to the issue under consideration certainly qualified as an error as the acceptance of such explanation is inconsistent with the facts and the law. Mere making a query on an issue does not absolve the Assessing Officer from his duty of appreciating the response of the tax payer. Even the courts have held that only in a case where two issues are possible and the Assessing Officer has adopted one of these, can it not be said that the order is erroneous: In my opinion, there cannot be a legally sustainable view, particularly when the facts of conversion of a capital assets into stock in trade and its transfer is acknowledged, that on account of legislation introducing the concept of TDR, capital gains
5 M/s. American Spring & Pressing Works Pvt. Ltd. becomes indeterminable and therefore cannot be levied. This is besides the point whether or not capital gains ought to have been levied in this case. Thus the order of the Assessing Officer is erroneous. That he has omitted to apply his mind to an issue which on examination of legal and factual matrix, could have resulted in additional tax become payable, makes the order prejudicial to the interest of the revenue.”
With regard to the claim of weighted deduction u/s 35(1)(ii) of the Act also, the Ld Principal CIT took the view that the AO has allowed the claim without examining the compliance of conditions.
Accordingly he set aside the assessment order passed by the AO and directed him to pass a fresh assessment order after affording opportunity of being heard to the assessee. Aggrieved, the assessee has filed this appeal before us.
The Ld A.R submitted that the Ld Principal CIT has placed reliance on the provisions of sec. 2(47)(v) of the Act to come to the conclusion that the transfer of the land has been completed during the year under consideration upon entering into the development agreement. He submitted that the assessee has converted its capital asset into Stock in trade and hence as per the provisions of sec. 45(2), the capital gain incidence would arise only upon the sale or transfer of the stock in trade. He invited our attention to the provisions of sec. 45(2), which reads as under:- “45(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a 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 full value of consideration received or accruing as a result of the transfer of the capital asset.”
The Ld A.R submitted that the assessee has given license only to the developer through the development agreement and hence there is no transfer of any asset. He further submitted that the Ld Principal CIT has taken the view that 6 M/s. American Spring & Pressing Works Pvt. Ltd. the provisions of sec. 2(47)(v) of the Act would be applicable to the impugned transaction of development of a land held as stock in trade. The Ld A.R invited our attention to sec. 2(47) of the Act, which commences as under:-
“2(47) “transfer” in relation to a capital asset, includes,--….”
The Ld A.R submitted that the definition of the term “transfer” given in that section would apply only in relation to a capital asset and not to Stock in trade. Accordingly he submitted that the reliance placed upon by Ld Principal CIT on sec. 2(47)(v) to come to the conclusion that the transfer of the asset is complete is legally not correct, since the assessee has entered into a development agreement with regard to Stock in trade and further the developer has given only a license under the agreement.
The Ld A.R submitted that the Ld Principal CIT has placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia Vs. CIT (supra) to support his view. He submitted that the Hon’ble Bombay High Court has explained the purpose of inserting the provisions of sec. 2(47)(v) of the Act as under in the above said case:- “In this case, the agreement is a development agreement and in our view, the test to be applied to decide the year of chargeability is the year in which the transaction was entered into. We have taken this view for the reason that development agreement does not transfer the interest in the property to the developer in general law and, therefore, s. 2(47)(v) has been enacted.”
He submitted that the Hon’ble Bombay High Court has explained that there would be no transfer of asset under the General law upon entering into a development agreement and it is so taken in view of the provisions of sec. 2(47)(v) of the Act. He submitted that the assessee has entered into a development agreement in respect of stock in trade and hence the provisions of sec. 2(47)(v) would not apply and hence there would not be any transfer under the General law. He further submitted that the cost of TDR is indeterminable in the hands of the assessee and on that count also there is no liability to 7 M/s. American Spring & Pressing Works Pvt. Ltd. capital gain tax. In this regard, he relied upon the decision rendered by the Hon’ble Bombay High Court in the case of CIT Vs. Sambhaji Nagar Co-op Hsg. Society Ltd (ITA No.1356 of 2012 dated 11-12-2014)(Bom), wherein it was held that no capital gain would arise, if the cost is not ascertainable. Accordingly he submitted that the AO has taken a possible view of the matter and the Ld Principal CIT was legally not correct in presuming that the transfer has been completed.
With regard to the issue relating to weighted deduction for donation paid to M/s ASPEE Agricultural Research and Development Foundation, the Ld A.R submitted that the above said foundation had required approval upto a particular date and thereafter it applied for renewal of the same. However, the renewal got delayed and hence the Ld Principal CIT has taken the view that the AO has not examined the same.
The Ld CIT D.R, however, submitted that the Ld Principal CIT has deliberated in a detail as to how the capital gain tax would arise during the year under consideration. He submitted that the action of the assessee in obtaining valuation reports as on 1.4.1981 and 1.4.2010 would show that the assessee was very well aware of the fact that the transfer of the asset has been completed during the year under consideration. He submitted that the deeming provisions of sec. 2(47)(v) would be applicable to the impugned transaction and the Ld Principal CIT has rightly applied the same by following the decision rendered by Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra). He further submitted that the AO did not discuss anything about these transactions in the assessment order.
With regard to the weighted deduction claimed by the assessee, the Ld CIT DR submitted that the assessing officer did not examine the said claim at all during the course of assessment proceedings. He submitted that the statute provides for compliance of certain conditions for availing weighted deduction and the same has not been examined by the AO at all.
8 M/s. American Spring & Pressing Works Pvt. Ltd.
We have heard the rival contentions and perused the record. Before going into the merits of the issue, we would like to discuss about the legal position with regard to the power of Learned CIT to invoke revision proceedings under section 263 of the Act. The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below:- “Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :
“The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.”
9 M/s. American Spring & Pressing Works Pvt. Ltd.
The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”
It is settled proposition of law that the Ld Pr. CIT can revised the order only if it is shown that the assessment order is erroneous in so far as prejudicial to the interests of the revenue. The question as to when an order can be termed as “erroneous” was explained by Hon’ble Bombay High Court in the case of Gabriel India Ltd (203 ITR 108) as under:-
“From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income tax officer. That would not vest the Commissioner with power to examine the accounts and determine the income himself at a higher figure. It is because the Income tax officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion…. There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed”
On the background of above said legal propositions, we shall now examine the issues before us. With regard to the first issue of taxability of capital gain, if any, arising on transfer of land upon entering into the development agreement, we notice that the Ld Principal CIT himself has 10 M/s. American Spring & Pressing Works Pvt. Ltd.
recorded in page 8 of his order that the assessing officer has examined the issue. However, the Ld Principal CIT has taken the view that the two events resulting in generation of capital gains, viz., (a) conversion of capital asset into stock in trade and (b) transfer of such asset has been completed as per the provisions of sec. 2(47)(v) of the Act, have been completed during the instant year.
The main contention of the assessee is that the view taken by the Ld Principal CIT is not in accordance with the mandates of the provisions of sec. 45(2) and sec. 2(47)(v) of the Act. We have already extracted both the provisions in the earlier paragraphs. Sec. 45(2) of the Act clearly provides that the taxability of the Capital gains would arise only in the year in which the stock in trade is sold. In the instant case, there is no dispute that the assessee has converted its capital asset into stock in trade as on 1.4.2010. The question is whether or not the transfer of stock in trade is completed upon entering into the development agreement ? The Ld Principal CIT has taken the view that the provisions of sec. 2(47)(v) shall apply to the impugned transaction and hence as per the said provision, the transfer shall be deemed to have been completed. However, the contention of the assessee with regard to the view so taken by Ld Principal CIT is twofold, viz., (a) the developer has been given only licencee rights and the possession has not been legally handed over and hence the provisions of sec. 2(47)(v) would not apply. (b) the deeming provisions of sec. 2(47)(v) would apply only to “Capital assets” and not to “Stock in trade”. Accordingly it was contended that the Ld Principal CIT erred in law in concluding that the transfer of asset, being “stock in trade” has been completed.
We find merit in the contentions of the assessee. As observed by Hon’ble jurisdictional Bombay High Court, there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect
11 M/s. American Spring & Pressing Works Pvt. Ltd. or incomplete interpretation a lesser tax than what was just has been imposed. In the instant case, in our view, the Ld Principal CIT has failed to show that the tax which was lawfully exigible has not been imposed, since we are of the view that there is merit in the contention of the assessee that the provisions of sec. 2(47)(v) will not apply to an asset held as “Stock in trade”, since the said provision very clearly states that it would apply only to “Capital assets”, i.e., the asset should have been held as Capital asset. Further it is the submission of the assessee that the possession of the asset has not been given to the developer, which is the main condition for applying the provisions of sec. 2(47)(v) of the Act. We notice that the Ld Principal CIT has failed disprove the said claim of the assessee. Hence, in our view, the AO has taken a possible view in this matter and further the Ld Principal CIT has failed to show that the tax which was lawfully exigible has not been imposed. It cannot also be said that the AO has applied the provisions on an incorrect way or there was incomplete interpretation of the provisions, since the view taken by the AO is a possible view. Hence we are of the view that the Ld Principal CIT has assumed jurisdiction u/s 263 of the Act on this issue without properly complying with the mandate of the section, i.e., he has failed to show that the assessment order was erroneous on this issue causing prejudice to the revenue. Accordingly we set aside the order passed by Ld Principal CIT on this issue.
With regard to the issue relating to weighted deduction u/s 35(1)(ii) of the Act, we notice that the assessing officer has failed to examine the same at all. Further the Ld Principal CIT has also observed that the weighted deduction is allowed upon compliance of certain conditions, which require examination. Under these set of facts, we are of the view that the Ld Principal CIT was justified in invoking revision provisions on this issue.
Since we have disposed of the appeal of the assessee, the stay application filed by the assessee shall become infructuous.
12 M/s. American Spring & Pressing Works Pvt. Ltd.
In the result, the appeal filed by the assessee is partly allowed and the stay application is dismissed.
Order has been pronounced in the Court on 24.5.2017.