ACIT, CENTRAL CIRCLE-2(3), HYDERABAD vs. ASIAN INFRA ESTATES LIMITED, HYDERABAD

ORDER Per Manjunatha, G. A.M These 3 appeals filed by the Revenue are directed against the separate, but identical orders passed by the learned

ITA Nos.683 & 685/Hyd/2022.

s in all the three appeals. Therefore, for the sake of brevity, grounds of appeals filed in for the A.Y 2019

20. (Asian Dwellings LLP) are hereby reproduced are as under:

“1. The learned CIT (A) erred both in law and on facts of the case in granting relief to the assessee.

2. The learned CIT (A) ought to have appreciated that, though assessee is a part land owner, it’s main activity is that of a facilitator/intermediary between the original land owners as per the Area Allocation Deed dated 02/01/2015 wherein it was clearly mentioned that there are 94 land owners and the assessee was the developer for the said land owners.

3. The learned CIT (A) having held that the assessee was required to transfer more than 10 lakh sft of built up area to the parallel owners and land dispute mediators after receipt of the built up area from the developer, erred in not appreciating that the assessee’s activity constituted business activity.

4. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary”.

Page 3 of 21 upon the assessee to explain as to why profits and gains arising out of conversion of inventory into capital asset cannot be brought to tax as per amended provisions of section 28(via) of the I.T. Act, 1961. In response, the assessee submitted that the appellant and other group companies along with other land owners had entered into joint development agreement with M/s. Skill Promoters (P) Ltd and received 55,400 sft commercial space in Block-A. The appellant has sold 27,700 sft commercial space in Block-A in the financial year relevant to A.Y 2018-19 and offered resultant capital gain to tax. The remaining 27,700 sft commercial space has been leased out to M/s. AMB Cinemas LLP, a sister concern of Asian Group. Since the appellant is a land owner and received built up area in pursuant to joint development agreement with builders, the asset remains continued to be capital asset but not inventory as alleged and consequently, the question of conversion of inventory into capital asset in terms of section 28(via) of the I.T. Act, 1961 does not arise.

Page 4 of 21 share is not acceptable. Therefore, the Assessing Officer held that the activity of the appellant in aggregating the land from various land owners and entering into JDA with M/s. Skill Promoters (P) Ltd is a business activity and whatever built-up area received in pursuant to said JDA as developer share becomes inventory or stock-in-trade of the assessee. Further, on leasing out of said stock-in-trade, the provisions of section 28(via) comes into operation. Therefore, he opined that the appellant has converted unsold inventory into capital asset and leased out to M/s. AMB Cinemas LLP and accordingly computed business profits u/s 28(via) of the I.T. Act, 1961 and by taking into account, the sale price received by the assessee for selling 27,700 sft adjacent commercial space to Shri Mahesh Babu and Smt. Namrata Shirodkar @ Rs.8379/per sft and computed business income of Rs.4,55,17,677/- in the case of the assessee.

Page 6 of 21 not attract provisions of section 28(via) of the Act, because said provision would come into operation only in a case where inventory of a business has been converted into or treated as a capital asset only. Since the appellant is received built up area as a land owner and also treated said built up area as a work in progress in the books of account, the question of application of provisions of section 28(via) of the Act, does not arise. Therefore, held that the provisions of section 28(via) does not apply to the facts of the present case. Accordingly, directed the Assessing Officer to delete the additions made towards income from business in terms of section 28(via) of the Act.

Page 8 of 21 55,400 sft commercial space as a land owner and the land given on JDA is a capital asset of the appellant and consequently any super structure received in pursuant to JDA remains a capital asset but not as an inventory. The learned Counsel for the assessee further submitted that assuming for a moment, the appellant has received part of commercial space as a developer, the fact remains that even in a case of developer any unsold inventory is let out to a third party, provisions of section 28(via) cannot be invoked, because said provision would come into operation only in a case for conversion of inventory into capital asset. In the present case, since there is no conversion of inventory to capital asset, the question of computing business income in terms of section 28(via) of the Act, does not arise. The learned CIT (A) after considering the relevant facts has rightly deleted the addition made by the Assessing Officer and their order should be upheld. In this regard, he relied upon the decision of the ITAT Hyderabad Benches in the case of Shri Sharat Gopal Boppana in & 638/Hyd/2022 order dated 27/06/2024.

Page 9 of 21 precedents. The learned Counsel for the assessee further referring to the decision of the Hon'ble Supreme Court in the case of PCIT vs. Abhisar Buildwell Ltd reported in (2023) 454 ITR 212 (SC) submitted that the additions made by the Assessing Officer in absence of any incriminating material cannot be sustained in case the assessment for the relevant A.Y is unabated/completed as on the date of search. In the present case, the date of search is on 22/10/2019 and as on the date of search, the assessment for the ay 2018-19 is unabated, because the date of issue of notice u/s 143(2) fort the A.Y 2018-19 was ended on 30/09/2019. Therefore, he submitted that the additions made by the Assessing Officer cannot be sustained and needs to be deleted.

Page 12 of 21 progress in their books of account and on the said basis, came to conclusion that the moment unsold inventory has been leased out, it amounts to conversion of inventory into capital asset. In our considered view, any asset whether capital asset or a stock- in-trade, remains continued to be a capital asset or stock-in- trade, even after leasing out to 3rd party. The utilization of the asset does not alter the nature of the asset in the books of account of the appellant. Since the appellant has treated unsold commercial space as a capital asset in their books of account, the said asset continue to be a capital asset even after leased out 3rd party. Therefore, we are of the considered view that the Assessing Officer has completely erred in invoking the provisions of section 28(via) of the Act, and to compute business income only on the ground that the appellant has leased out unsold commercial space and same partakes the nature of conversion of inventory into capital asset. The learned CIT (A) after considering the relevant facts has rightly held that the leasing out unsold commercial space would at best tantamount to exploitation of the built up area, but it cannot be said that it is a conversion of inventory into capital asset for the purpose of section 28(via) of the I.T. Act, 1961.

“17. The next issue that came for consideration from ground no.5 of Revenue appeal is deletion of addition made towards income on account of unsold inventory list treated as fixed assets amounting to Rs.6,45,35,000/-. 17.1. The facts of the impugned dispute are that the assessee has entered into the joint development agreement in 2009 for development of property and offered relevant capital gain for tax in assessment year 2010-11. The assessee has entered into a sharing agreement dt.02.11.2015 with the developer M/s. Skills Promoters Pvt. Ltd. and has received a total built up area of 4,10,125 sq.ft in different floors. Out of the total built up area of 4,10,125 sft, the assessee family has sold 45,153 sq.ft in different years and has leased out 2,32,144 sq.ft out of the reaming built up area. During the course of assessment proceedings, the Assessing Officer observed that by entering into the joint development agreement with the developer, the assessee has commercially exploited the property by carrying out business activities and has also undertaken inventory risk, credit risk and market risk. Therefore, opined that property received in pursuant to the joint development agreement become inventory of the assessee and thus, as per the provisions of Section 28(via) of the Act, which is applicable from 01.04.2019 relevant to assessment year 2019-20, when inventory is converted into capital asset, then fair market value of the property as on the date of conversion should be treated as profits and gains from business. Therefore, invoked the provisions of Section 28(via) and by applying the fair market value of the property, department value of the property at Rs.25.81 crores and assessed sum of Rs.6,45,35,000/- being 1/4th share of the assessee under the head income from business and profession. 17.2. Being aggrieved by the assessment order, the assessee carried the matter in appeal before the first appellate authority. 17.3. Before the ld.CIT(A), the assessee submitted that the property held by the assessee is purely capital asset and Page 14 of 21 continued to be capital asset even after joint development of the property and thus, provisions of Section 28(via) cannot be applied. The assessee further contended that the said provision is applicable from 01.04.2019 relevant to assessment year 2020-21 and thus, the said provision cannot be applied for the impugned assessment year. The ld.CIT(A) after considering the relevant facts and also taken note of provisions of Section 28(via) of the Act, observed that said provisions do not apply to the facts of the present case, because the assessee has held the property, as investment even before the joint development agreement and after the joint development agreement, the property continued to be a capital asset and income derived from the said property has been offered to tax under the head 'income from house property'. The ld.CIT(A) further held that provisions of section 28(via) apply to a case where inventory / stock- in-trade converted to a capital asset. In the present case, since there is no conversion of inventory into capital asset, application of section 28(via) is incorrect and thus, direct the Assessing Officer to delete the addition made towards profits and gains from business u/s 28(via) of the Act. 17.4. Aggrieved by the order of ld.CIT(A), the assessee is in appeal before us. 17.5. The ld.DR, on the other hand, submitted that the ld.CIT(A) erred in deleting the addition made by the Assessing Officer towards profits and gains from business as conversion of inventory into fixed assets without appreciating the fact that the assessee has entered into joint development agreement and has carried out business activities, which is evident form the terms of joint development agreement between the parties and subsequent activities carried out by the assessee. The ld.DR further submitted that the assessee has received huge extent of developed area in pursuant to joint development agreement, has let out the said property, to various parties, which is in the nature of adventure in the nature of trade and commerce and thus, when the inventory has been converted into fixed assets, provisions of Section 28(via) are applicable and the Assessing Officer has rightly applied the said provisions. 17.6. The learned counsel for the assessee, on the other hand, supporting the order of ld.CIT(A) submitted that the assessee is a land owner, had entered into joint development agreement for development of the property.

The assessee has received built up area in the exchange of land in the year 2009 when the joint development agreement was entered into with a developer. The assessee has offered long term capital gain for A.Y. 2010-11, when the joint development agreement was entered into. The subsequent receipt of property in the form of built up area in exchange of land was also held as 'investment' (fixed assets) and the assessee never treated built up area as inventory. The assessee never carried out any business activity. Therefore, the question of holding constructed built up area, as inventory and subsequent conversion into capital asset does not arise. The Assessing Officer on presumption and on hypothetical basis, applied provisions of section 28(via). The ld.CIT(A) after considering the relevant facts, has rightly deleted the addition made by the Assessing Officer and the order should be upheld. 17.7. Heard both the parties, perused the materials available on record and have gone through the orders of authorities below. There is no dispute with regard to the fact that the assessee and their family members had entered into joint development agreement with M/s. Skills Promoters Pvt. Limited on 11.05.2009. It is also not in dispute that the assessee and their family members had offered capital gain for tax in A.Y. 2010-11 on the basis of date of joint development agreement and paid relevant taxes and the same has been accepted by the Assessing Officer, in pursuant to re- assessment proceedings u/s 147 of the Act. The Assessing Officer assessed the value of the property retained by the assessee and let out to various parties as profits and gains of business and profession in terms of Section 28(via) on the ground that the assessee's activity entering into joint development agreement with the developer and subsequent receipt of developed building is in the nature of trade and commerce and further, the built up area received by the assessee and their family members for exchanging the land becomes inventory of the assessee. The Assessing Officer further observed that since the assessee has let out the property, the nature of conversion of inventory into capital asset, in terms of Section 28(via) and thus, the fair market value of the inventory, as on the date on which it was completed into, are treated as capital asset should be assessed as income from business. 17.8. We have given our thoughtful consideration to the reasons given by the Assessing Officer to assess fair market value of the property under the head income from Page 16 of 21 business, in terms of section 28(via) and we ourselves do not subscribe the reasons framed by the Assessing Officer. The Assessing Officer made additions purely on assumptions and presumptions, without there being any activity carried out by the assessee, which falls under the provisions of 28(via) of the Act. The assessee, being the land owner, entered into joint development agreement with the developer in the year 2009 and has received built up area in exchange of land to the builder. The land held by the assessee and their family members was a capital asset and this fact has been further strengthened by the acceptance of capital gain by the department in the A.Y. 2010-11. Further, the assessee continued to be held the land as capital asset, which is evident from the property sold by the assessee in different assessment years and resulted capital gain offered to tax and also portions of the property let out by the assessee and their family members and resulted income was offered under the head income from house property. 17.9. From the above, it is undisputedly clear that the property held by the assessee was a capital asset and continued to be capital asset even after joint development agreement and thus, invoking provisions of section 28(via) is misconceived and against the spirit of law. Further, as per the explanatory memorandum to the Finance Bill 2018, the rationale behind insertion of 28(via) has been explained and as per the said Memorandum, the provision has been inserted to give similar treatment to provisions of Section 45 of the Act, which provides for capital gain arising from application of capital asset into stock-in-trade. Whereas, in cases, where the stock-in-trade converted into or treated as capital asset, the existing law does not provide for its taxability. In order to provide simple treatment and describe the practice of difference payment of tax by converting into the inventory into fixed assets, provisions of Section 28(via) have been inserted w.e.f. 01.04.2019. If you go by the logic behind for insertion of said provision, it is clear that the said provision is applicable only in a case where inventory of business has been treated or converted into capital asset but not otherwise. 17.10. In the present case, the facts brought on record clearly indicate that the assessee was not into the business and the question of carrying inventory and subsequent application of fixed assets does not arise. It is only the Page 17 of 21

Assessing Officer, who imagined and stated that the assessee carried the inventory of business and subsequently, converted into fixed assets without there being any substance in his observation. These facts clearly show that the assessee is an investor and the property held by the assessee was an investment or capital asset all along and even after receipt of built up area from the developer. Therefore, in our considered opinion, the Assessing Officer has erred in applying the provisions of Section 28(via) of the Act. The ld.CIT(A) after considering the said facts has rightly deleted the addition made by the Assessing Officer. Thus, we inclined to uphold the findings of ld.CIT(A) and reject the grounds taken by the Revenue.”

A.Y 2018-19 in the case of Asian Infra Estates Ltd, we find force in the argument advanced by the learned Counsel for the assessee in light of petition filed under Rule 27 of the ITAT Rules, 1963. The appellant has filed a petition under Rule 27 of the ITAT Rules, 1963 in support of the order of the learned CIT (A) on the issue

Page 18 of 21 decided against the appellant. The assessee has taken legal ground challenging the addition made by the Assessing Officer towards income from business on account of conversion of inventory into capital asset in light of certain judicial precedents including the decision of the Hon'ble Supreme Court in the case of PCIT vs. Abhisar Buildwell Ltd (Supra) and argued that in unabated/concluded assessment, no addition can be made in absence of any incriminating material found during the course of search. We find that in the present case, the assessment for the impugned A.Y is unabated as on the date of search, because the time limit for issue of notice u/s 143(2) of the I.T. Act, 1961 for the A.Y 2018-19 would end on 30/09/2019, whereas the search had taken place in the present case on 22/10/2019. Going by the date of search, there is no dispute on the fact that the assessment for the A.Y 2018-19 is unabated/concluded as on the date of search. Once the assessment is unabated, then no addition could be made in the assessment order passed u/s 153A of the Act, in absence of any incriminating material found during the course of search and this legal principle is supported by the decision of the Hon'ble Supreme Court in the case of PCIT vs. Abhisar Buildwell Ltd (Supra) where it has been held as under:

“Section 153A, r.w.s 132 and 143 of the I.T. Act, 1961 – Search and Seizure – Assessment in case of (conditions precedent) – Whether object of section 153A is to bring under tax undisclosed income which is found during course of search or pursuant to search or requisition; therefore, only in a case where undisclosed income is found on basis of incriminating material, Assessing Officer would assume the jurisdiction to assess or reassess total income for entire six years block

Page 19 of 21 assessment period even in case of completed/unabated assessment – Held, yes – Whether I case of search u/s 132 or requisition u/s 132A, Assessing Officer assumes jurisdiction for block assessment u/s 2153A and that all pending assessments/re-assessments shall stand abated – Held, yes – Whether in respect of completed assessments/unabated assessments no addition can be made by Assessing Officer in absence of any incriminating material found during course of search u/s 132 or requisition under section 132A – Held, yes – Whether, however, completed/unabated assessments can be reopened by Assessing Officer in exercise of powers u/s 147/148 subject to fulfilment of conditions as envisaged/mentioned u/s 147/148 and those powers are saved – Held, yes (Paras 8,12 to 14) (In favour assessee)”.