RAMESH W SAWANT,MUMBAI vs. ASST CIT CIR 3, THANE

आयकर अपीऱीय अधिकरण “सी” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “ C ” BENCH, MUMBAI सर्वश्री संजय गगव, न्याययक सदस्य एवुं श्री राजेश क मार, ऱेखा सदस्य के समक्ष । BEFORE HON’BLE S/SHRI SANJAY GARG, JUDICAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER आमकय अऩीर सं./ (ननधधायण वषा / Assessment Year:2008-09) बनाम/ Ramesh W Sawant, Asstt. Commissioner of Income Tax 6th floor, Ashar I T Park Road 205-A, Poornima Apartments Vs. CGHS, Pedder Road, No.16-Z, Wagale Industurail Estate, Mumbai-400026 Thane-400604. (अऩीरधथी /Appellant) (प्रत्मथी / Respondent) .. स्थधमी रेखध सं./जीआइआय सं./PAN. :ANFPS2683D अऩीरधथी ओय से / Appellant by Shri V G Ginde प्रत्मथी की ओय से/Respondent by Dr.S Pandian सुनवधई की तधयीख / Date of Hearing : 23.3.2016 घोषणध की तधयीख /Date of Pronouncement: 20. 5.2016 आदेश / O R D E R Per RAJESH KUMAR, ACCOUNTANT MEMBER:

The sole issue raised by the assessee in all the grounds of appeal is in respect of rejection claim of the assessee of Fair Market Value of Rs.4,58,30,000/- on the date of conversation of fixed assets (land) in to stock-in-trade u/s 45(2) of the Income Tax Act, 1961 for the purpose of computing the profit from project “Devashree Garden Project” developed by the assessee.

2. The brief facts of the case are that the assessee filed his return of income on 30.9.2008 declaring total income at Rs.2,50,62,945/-. The 2 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 return of income was processed u/s 143(1) of the Act and thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2)( and 142(1) were issued on 25.10.2010 and duly served upon the assessee. The AO completed the assessment u/s 143(3) at Rs.3,88,40,178/- by making various disallowances. The plot of land on which the project “Devashree Garden Project” was constructed was owned and acquired prior to 1.4.1981 by the assessee at a cost of Rs. 3,50,541/- as business asset and was appearing the schedule of fixed assets till the date of conversion to stock in trade for the purpose of construction of flats. The assessee was doing warehousing business prior to embarking up property development business and there was warehousing complex on the said plot which was demolished to convert the plot of land into stock-in-trade from the financial year 2004-05 and consequently treated the said cost of land of Rs.3,50,541/- as part of work-in-progress. The assessee got the said land valued on 1.4.1981 and 1.4.2005 for the purpose of calculating the long term capital gain during the financial year 2007-08. As per the valuation report dated 28.03.2008 the FMV of the plot as on 1.4.2005 was Rs.4,58,30,000/- whereas the value as on 1.4.1981 was Rs.49,34,400/-. The assessee calculated the long term capital gain at Rs. 2,21,445,880/-on the said plot as per the provisions of section 45(2) of the Act after indexing the of the cost of land as on 01.4.1981 same till 2004-05 the year of conversion of said plot into stock

3 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 in trade and the indexed cost was calculated at Rs.2,36,85,120/- . However, the assessee by mistake took the cost of the land at Rs.2,36,85120/- for the purpose of calculating the business income as against the fair market value of Rs.4,58,30,000/- on the date of conversion into stock-in-trade and the assessment was completed accordingly.The mistake was first realized by the assessee while filing the appeal before the CIT(A) by taking an additional Ground no.6 besides other grounds which reads as under : “On the facts and in the circumstances of the case, and in law, the ld. AO erred in not substituting the cost of land at Rs.4,58,30,000/- instead of Rs.2,36,85,120/- mistakenly adopted by the appellant in the books of account in computing the business income”.

4 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 the income from Long term capital gains at NIL. The relevant para 13 and 14 of the ld. CIT(A)’s order is reproduced below:

“ 13. I have carefully considered the appellant's submissions, the observations of the AO in the remand report and the facts of the case. In view of the various judgments referred to above, the additional ground raised by the appellant is admitted being a legal ground on the same facts of the case as are already available on record. The contention of the appellant is that he had held some land as a 'business asset' in his earlier business of running of a cold storage. This land had been converted by him into stock-in-trade as on 01.04.2004 for his new business of construction and development of Real Estate Project. This land was a capital asset of the appellant. The appellant had shown capital gain on the conversion of the land into stock in trade which had been accepted by the A.O. The value of the land was at Rs. 3,50,5411- in his balance-sheet as on 31.03.2004. The same value of the land was also adopted in the subsequent assessment years till 31.03.2007 and was shown as such in work-in-progress. The appellant got the land value as on 1.04.1981 at Rs.49,34,4001- and the indexed cost of the land as on 31.03.2005 was worked out at Rs. 2,36,85,1201-. The Fair market value of the land as on 31.03.2005 was worked out at Rs. 4,58,30,000/- which was taken as the sale consideration for the purpose of calculating the capital gains as on the date of conversion of capital asset into stock-in-trade, resulting in Long Term Capital Gain of Rs.2,21 ,44,8801-.

14. With regard to this contention of the appellant it is seen that though the appellant has claimed that the land shown in his earlier business as an asset, was a capital asset and was converted into stock-in-trade for the purpose of the new business of real estate development, no such evidence is available on record. The land was a business asset of the appellant in his earlier business and continued to be a business asset for his new business of real estate development. There is nothing on record to suggest that the appellant had treated the land as a capital asset and had converted the same into stock-in-trade as rightly observed by the A.O. in his remand report. It is seen that the appellant continued to show the land at its cost value in the work-in-progress till 31.03.2007. Had the appellant actually converted the land in stock-in-trade, the liability of the tax payable in respect of capital gains for the relevant

5 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 assessment year would have been reflected in the appellant's accounts. The appellant has not shown any such capital gains or any liability of tax payable towards capital gains for the A.Y. 2005~06 or 2006-07 or 2007-08. Even, during the year under consideration i.e. A.Y. 2008-09, nothing to this effect was reflected in the books of accounts or the audit report or the return of income. No such claim was made during the course of assessment proceedings before the A.O. It is only during the course of present proceedings that such a claim has been made by way of an additional ground of appeal

. Therefore, it is clear that the appellant never treated the land as a capital asset which was a business asset for the appellant and continued to be a business asset for his new business. In the absence of any evidence on record for conversion of the same into stock-in-trade, the appellant's claim in this regard cannot be accepted. As a result, the A.O. is directed to adopt the cost of the land in the Profit & Loss Account at Rs. 3,50,541/- as against Rs. 2,36,85,120/- claimed by the appellant in the Profit & Loss Account i.e. make an addition of Rs.2,33,34,579/- to the business income of the appellant and treat the capital gains at NIL as against the capital gains of Rs.2,21,44,880/- shown by the appellant in the return of income. The A.O. is directed accordingly.”

4. The ld. AR submitted before us that the action of ld. CIT(A) is totally wrong and against the provisions of section 45(2) of the Act. The ld. AR submitted that the assessee committed the mistake by taking the indexed cost the FMV of land of Rs.4,58,30,000/- as on 31.3.2005 as the cost of land while computing the business income inadvertently , and instead of the indexed cost of land Rs.2,36,85,120/- on 1.4.2005 was taken for the purpose of computing the business income which was an apparent mistake on the part of the assessee and contrary to the provisions of section 45(2) of the Act. The ld. AR further submitted that the first appellate authority instead of granting relief to the assessee as claimed in the ground No.6 by raising a legal issue enhanced the assessment by 6 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 directing the AO to treat the original cost of land of Rs.3,50,541/- while computing the business income and further directed the AO to treat he income from Long Term Capital Gain at NIL. It was bought to our notice that though the assessee not claimed FMV of the land on the date of conversion of land (fixed assets) into stock-in-trade in financial year 2004- 05, lawful deduction to which the assessee was entitled could not be denied. Upon realizing the mistake committed by the assessee, the assessee has rightly raised the issue before the ld. CIT(A) who ignored the provisions of section 45(2) of the Act by giving flimsy reasons such as assessee continued to show the cost at Rs.3,50,541/- as cost of land in Work-in-Progress till 31.3.2007. The ld.CIT(A) further erred in holding that the assessee did not show any capital gain tax liability for the Assessments years 2005-06, 2006-07 and 2007-08 as payable whereas the provisions of section 45(2) of the Act clearly provides for payment tax in the year of sale of stock-in-trade, holding that the grounds raised was after thought and thus wrongly rejected the genuine claim of the assessee. Finally the ld.AR vehemently submitted before us that the order of ld. CIT(A) be reversed on this issue and the AO be directed to substitute the FMV of the land of Rs.4,58,30,000/- in place of Rs.2,36,85,120/-.

5. Per contra, the ld. DR relied on the orders of authorities below and submitted that the assessee on his own claimed the cost of land of 7 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 Rs.3,50,541/- under the head work-in-progress till 31.3.2007 and therefore, the assessee could not be allowed the inflated cost of land which was after thought in order to reduce the tax liability of the assessee.

6. We have carefully considered the rival contentions and perused the material placed before us and find that the assessee who was carrying on the business of warehousing till 31.3.2004 decided to the development of real estate and developed housing project under the name and style of “Devashree Garden Project” on the piece of land already owned by him which was shown under the head fixed asset till 31.3.2004 and thereafter the said cost of land of Rs.3,50,541/- was transferred to Work in progress during the financial year 2004-05. The assessee completed the project in the financial year 2007-08 relevant to the assessment year 2008-09 and offered the income from the said project “Devashree Garden Project” under the head “income from business”. The said business income was computed by taking the cost of land at Rs.2,36,85,120/- as on 31.3.2005 by indexing the FMV of land as on 1.4.1981 of Rs.49,34,400/- as the said land was purchased by the assessee prior to 1.4.1981. The assessee also got the said land valued on 31.3.2005 at Rs.4,58,30,000/- for the purpose of calculating long term capital gains on the conversion of the land (fixed assets) into stock-in-trade and for the purpose of calculating the Long term capital gains under the provisions of section 8 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 45(2) of the Act. For the sake of convenience we reproduce the provisions of section 45(2) of the Act : “Capital gains. 45. [(1)] …………. [(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 the full value of the consideration received or accruing as a result of the transfer of the capital asset.] 4[(2A) 5Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of— (i) section 48; and (ii) proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method. Explanation.—For the purposes of this sub-section, the expressions "depository" 6 and "security" 6 shall "beneficial owner" , have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub- section (1) of section 2 of the Depositories Act, 1996.] From the provisions of section 45(2), it is clear that if the assessee converts its fixed assets into stock-in-trade of a business carried by him then the profits arising or gains from the transfer by way of conversion of capital assets into to stock-in-trade shall be chargeable to income tax as income of the previous year in which the such stock-in-trade is sold or otherwise transferred by the assessee and it was further provide in this 9 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4 section that for the purpose of calculating he gains or loss on the said assets, FMV of the asset on the date of conversion shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Further the transfer in relation to capital assets is defined under section 2(47) of the Act and included any conversion of fixed assets into stock-in-trade in clause (iv) of section 2(47) of the Act. We find from the record placed before us that the assessee was entitled to take FMV of the land on 31.3.2005 at Rs.4,58,30,000/- as the cost of land for the purpose of calculating the business income Whereas the assessee inadvertently took the index cost of assets at Rs.2,36,85,120/- as the cost of land and thus, the income of the assessee was overstated accordingly to this extent of Rs.2,21,43,880/-. Whereas the income from the Long term capital gains was rightly computed and shown at Rs.2,21,44,880/-. We are in agreement with the findings of the ld. CIT(A) that the assessee continued to treat the cost of land at Rs.3,50,541/- as part of work in progress till 31.3.2007 but disagree with his finding that the cost of land for the purpose of computing the business income should be taken at Rs.3,50,541/-. In our view, the assessee is entitled to take cost of land at Rs.4,58,30,000/- being FMV as on 31.3.2005 which is the date of conversion of asset into the stock in trade. In view of above facts, the order of ld.CIT(A) in enhancing the value of assets of the assessee and not allowing the claim of the assessee is 10 I.T .A. N o .2 0 6 2/ Mu m /2 0 1 4