GURUVENDRA SINGH ,KOTA vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1, KOTA, KOTA

vkns'k@ ORDER PER: RATHOD KAMLESH JAYANTBHAI, AM This appeal filed by assessee is arising out of the order of the National Faceless Appeal Centre, Delhi dated 19/01/2023 [here in after (NFAC)] for assessment year 2016-17 which in turn arise from the order dated 12.12.2018 passed under section 143(3) of the Income Tax Act, by the CPC, Bengaluru.

2 Guruvendra Singh vs. ACIT, Circle-01, Kota 2. The assessee has marched this appeal on the following grounds:- “

1. In the facts and circumstances of the case and in law, Id. CIT(A)/National Faceless Appeal Center "NFAC") has erred in confirming the action of Id. AO, in bringing Rs. 1,47,42,303 to tax for the year under consideration and adding such amount to the income of the assessee. The action of Id. CIT(A)/NFAC is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the entire additions made by Id. AO and confirmed by Id. CIT(A) / NFAC.

2. In the facts and circumstances of the case and in law, Id CIT(A)/NFAC has erred in confirming the action of Id. AO, in denying the exemption to the assessee of Rs. 1,47,42,303, under Section 54B of the Income Tax Act, 1961. The action of Id. CIT(A)/NFAC is illegal, unjustified and arbitrary and against the facts of the case. Relief may please be granted by allowing exemption of Rs. 1,47,42,303, under Section 54B for consideration.

3. The assessee craves his right to add, amend or alter any of the ground on or before the hearing.”

3. The fact as culled out from the records is that in this case, e- Return was filed on 15/10/2016 declaring total income of Rs. 17,78,160/-. The case was selected for limited scrutiny through CASS and notice u/s 143(2) issued on 18.07.2017, which was duly served via mail. Vide notice u/s 142(1) dated 26.06.2018, a detailed questionnaire was sent to the assessee. Assessment was completed, under section 143(3) of ITA, vide order, dated 12.12,2018, wherein, the claim made by the assessee under section 54B for an amount of Rs. 1,47,42,303 was rejected by the ld. AO. On the following grounds:

3 Guruvendra Singh vs. ACIT, Circle-01, Kota i) on the one hand the assessee stated that the agricultural land sold by him and on the other submitted that the said land converted as stock in trade. ii) As the assessee converted stock in trade on 11.10.2012 has not invested the amount claimed u/s. 54B within 2 years from the said date of conversion of stock in trade. iii) The agreement for land of Rs. 2,62,00,000/- and out of total amount Rs. 2,38,82,541/- was stated to have been received by the seller. Cost of new assets purchased as per ITR at Rs. 1,48,00,000/- whereas as per form 26QB the total amount was Rs. 21,41,207/-. The ld. AO noted that these land has been converted to residential category and thus it was not an agricultural land. iv) Assesseee has sold and purchased many properties during the year as this is his business. The amount of advance paid of the total agreed amount so that somehow the claim of 54B can be justified. v) The date of purchase of the land pertaining is for A. Y. 2018-19. vi) Against the claim of the assessee that he earns income agricultural income on that ld. AO noted that it is immaterial for the purpose of section 54B that assessee earning income from the other lands or not.

Based on the above observations the ld. AO did not considered the claim of the assessee u/s. 54B for an amount of Rs. 1,47,42,303/-.

4. Feeling dissatisfied from the above finding recorded for denying the claim u/s. 54B of the Act the assessee carried the matter in appeal before the ld. CIT(A). Apropos to the ground so raised by the assessee, relevant finding of the ld. CIT(A) is reiterated here in below:

4 Guruvendra Singh vs. ACIT, Circle-01, Kota “6.2 Decision: I have perused the assessment order, grounds of appeal and submission of the Appellant. I find that during the assessment proceedings, the AO noted that the conditions for allowing the exemptions u/s 54B were not fulfilled. Therefore the AO had issued show cause notice to the Appellant to explain as to why the exemption u/s 548 should not disallowed. In response the Appellant filed detailed reply but failed to prove that the investment was made in purchase of agricultural land within 2 years from the date of transfer of original asset. the exemption u/s 54B of Rs.1,47,42,303/- DEPARTME AD had disallowed the During the Appellant proceedings, the Appellant has submitted detailed reply reiterating the facts submitted before AO and claimed that the capital gain the transfer of original asset was taxable in the year, when the stock in trade is sold. However, conditions for claiming exemption u/s 54B are very clear about the time limits for making investment in new asset. It is admitted fact that the original asset was transferred on 11/10/2012, however the Appellant has not been able to demonstrate before me that the investment is made within the prescribed time limit of 2 years from the date of transfer of original asset. Therefore the exemption u/s 54B is not allowable. Therefore the addition of Rs.1,47,42,303/- is confirmed.

The charging of interest u/s 234B and 234C is mandatory as per the recent decision of Supreme Court of India in the case of CIT vs. Bhagat Construction Co Pvt Ltd in Civil Appeal No.1169 of 2006 vide order dated 06/08/2015 wherein it is held that the charging of interest u/s 234B is automatic when the condition of section 234B are met. As per the provisions of section 234B, if the advance tax paid is less than 90% of assessed tax then the interest u/s 234B is chargeable. The assessed tax is defined as tax on total income determined u/s 143(1) or regular assessment. Thus there is no fault in action of charging interest u/s 234B and 234C by the AO.

In view of the above, the ground No. 2 to 8 are dismissed.”

5 Guruvendra Singh vs. ACIT, Circle-01, Kota ld. AR of the assessee filed a detailed written submission as restated here in below : I. Assessee, an individual, filed his Return of Income, for the year under consideration, at a total income of Rs 17,78,160, claiming benefit of exemption under Section 54B of the Income Tax Act, 1961 (“ITA”) of Rs 1,47,42,303.

II. Assessment was completed, under Section 143(3) of ITA, vide order, dated 12.12.2018, wherein, the entire claim made by the assessee under Section 54B of Rs 1,47,42,303, was rejected by the ld. AO.

III. Against order of ld. AO, assessee preferred appeal before the National Faceless Appeal Centre (“NFAC”), who vide order dated 19.01.2023, dismissed the appeal of the assessee. Aggrieved by the said order of NFAC, the present appeal has been preferred by assessee, before the Hon’ble ITAT, Jaipur Bench.

GROUNDS OF APPEAL GROUND NO. 1, 2: DENYING BENEFIT OF EXEMPTION UNDER SECTION 54B AMOUNTING TO RS. 1,47,42,303.

1.1. Assessee was the owner of an agricultural land, consisting of 29.0625 bighas, situated at Khasra no. – 321, Gram Sogriya, Teshil Ladpura, Kota (Rajasthan) (“the land”). Assessee, till the year 2012, was carrying out agricultural activities on the land. The same can be verified from the Khasra Girdawri Report placed at Paper Book Page 12-20.

1.2. Thereafter, in the month of October 2012, the land was converted by the assessee from agricultural to residential in nature, for the purpose of selling the land, after plotting.

1.3. In this regard attention is drawn towards the report of Urban Improvement Trust Kota (“UIT”) [PB : 21-24], from where the following factual position is discernable:- Report of UIT, Kota Date of Report: 05.10.2012

Tehsil District Village Khasra No. Total Area (In Hectare) Ladpura Kota Sogriya 320 and 321 4.60 The land was used for agriculture purposes before Para 3 of UIT Report (PB:21) conversion into residential land The land will be used for residential purpose with effect Para 4,5 and 6 of UIT Report from the date of UIT Report. (PB:22)

1.4. The land was thereafter converted by the assessee, from being part of his Capital Asset into Stock in Trade. Gains on the sale of such stock in trade and prior to such sale i.e. gains till the date of conversion, was computed by the assessee in terms of Section 45(2) of ITA.

1.5. Thereafter, as and when such stock in trade was sold to the ultimate buyer, capital gains and corresponding business income was offered for tax in the year in which such stock in trade was ultimately sold by the assessee. The same was in accordance with Section 45(2) of the ITA.

1.6. Working in this regard, offering the gains on sale of part of the land, in the form of Capital Gains and Business Income, as per Section 45(2) of the ITA is as under:- AY Business Capital Gain Full Value of Cost of Exemption Exemption Income Consideration Acquisition u/s 54B u/s 54F based on (E) Valuation (F) Report (C = D-E-F- (G) (D) (B) G) (A) 2014-15 14,10,855 Nil 82,62,098 23,464 49,93,000 34,45,634 2015-16 27,87,770 Nil 2,00,04,860 56,812 1,54,73,930 44,74,118 2016-17 18,55,935 Nil 14784290 41,987 1,47,42,303 NIL

1.7. Against the amount of Capital Gain, assessee claimed benefit of Section 54B of ITA. Out of the money so received on sale of stock in trade, assessee invested such amount for the purpose of acquiring another agricultural land. The above factual position has not been disputed by the lower authorities. 1.8. Details as regard the conversion of land from Capital Asset to Stock in Trade, Sale of Stock in Trade and thereafter purchase of agricultural land, for the year under consideration, are as below: - AY 2016-17 Particulars Date/Period Evidence Date of Conversion from Agriculture land to Residential land 05.10.2012 UIT Report, Kota as well as Capital Asset to Stock in Trade (PB: 21-24) Sale of Stock in Trade AY 2016-17 Return of Income along with Computation of Income (PB: 1-3)

Purchase of agriculture land for claiming Exemption u/s 54B of Rs.1,47,42,303 Particulars Date of Agreement Land 1 (Rs. 60,00,000 out of which exemption under 31.03.2016 Section 54B of Rs.41,00,000 was claimed during year under [CIT(A) Order Page 10] consideration) Land 2 (Rs.2,62,00,000 out of which exemption under 14.12.2017 Section 54B of Rs.1,08,12,841 was claimed during year under consideration) [CIT(A) Order Page 9-10]

1.9. Apart from the Agriculture Lands, as stated above, purchased by the assessee, in order to claim benefit under Section 54B, the assessee had also purchased a residential land, for consideration of Rs. 1,22,00,000 (“Residential Land”).

2. ASSESSING OFFICER

2.1. Ld. AO rejected the claim of the assessee by stating that the assessee had not invested in the new agriculture land, within the stipulated time period as provided in Section 54B.

3. NATIONAL FACELESS APPEAL CENTRE

3.1. Elaborate Submissions were made before the NFAC, by the assessee, which have also been reproduced by the NFAC in its order from Pages 4 to 18.

3.2. Before the NFAC, the factual aspects wrongly considered by the ld. AO were clarified. These have been tabulated infra.

3.3. NFAC, at Page 18 of its order, rejected the claim of the assessee, under Section 54B, for the reason that as per Section 54B assessee was required to purchase agriculture land, within 2 years from the date of transfer of land, whereas, in the present case, such agricultural land was purchased after 4 years i.e. in the year 2016 from the conversion of the land from capital asset into stock in trade.

4. SUBMISSION

4.1. Ld. AO, during the course of assessment proceedings, misconstrued certain factual positions. On such wrong premise ld. AO rejected the claim of the assessee made under Section 54B. Thereafter, during the appellant proceedings, the entire factual position was clarified before the NFAC, which was then accepted by NFAC. Snapshot of incorrect factual position considered by the assessee and, thereafter, clarified before the NFAC is as under: - S.No. Facts wrongly construed Clarification made before NFAC and accepted by NFAC by ld. AO  1 For claiming benefit under During the year under consideration, assessee purchased agriculture Section 54B, assessee land, wherein, the assessee made payment of Rs. 1,49,12,841 [Rs purchased residential land Rs.41,00,000 Plus Rs.1,08,12,841]. The said amount was utilised for for Rs. 1,22,00,000. claiming benefit under Section 54B. [Refer Para 1.8 above]  Apart from this, the assessee had also purchased another residential land for Rs. 1,22,00,000 on such payment, assessee deducted tax at source under Section 194IA and also filed Form 26QB.  The said investment, in residential land, had no correlation with the claim of benefit made under Section 54B which was strictly in relation to the purchase of agriculture land by the assessee [Refer Para 1.8 above].  However, ld. AO misconstrued the purchase of residential land to be that made for claiming benefit under Section 54B.  The same was clarified before NFAC at Page 10-11 and accepted by the NFAC. 2 Assessee tried to force-fit  Assessee made total investment of Rs.1,49,12,841 in two agriculture the purchase of many lands for claiming exemption against under Section 54B against the properties for the purpose Long-Term Capital Gain. of claiming benefits under  However, exemption under Section 54B was restricted to long term Section 54B. capital gain earned during the year i.e. Rs.1,47,42,303  Assessee never utilized the amount for purchase of residential land, for the purpose of claiming benefit under Section 54B.  The same was clarified before NFAC at Page 10-11 and accepted by the NFAC. 3 Out of the total agreed  Assessee paid Rs. 2,08,12,841 (out of which Rs. 1,08,12,841 claimed amount of Rs. 2,62,00,000 in period under consideration) as against the agreement value of of one agriculture land, Rs.2,62,00,000. assessee claimed Rs.  Benefit under Section 54B was taken for the amount which was paid

9 Guruvendra Singh vs. ACIT, Circle-01, Kota 1,08,12,841 under Section during the year consideration, which was Rs. 1,08,12,841.  54B, whereas, as per the Thus, the assessee had claimed benefit under Section 54B, to the sale agreement, the extent to which the assessee was entitled to as per the provisions of assessee paid Rs. the ITA. 2,38,82,541 out of the total agreed amount. (AO Order Page 4)

4.2. Thus, the factual position, wrongly construed by the ld. AO, during assessment proceedings, was clarified before the NFAC and was duly accepted by the NFAC. NFAC rejected the claim of the assessee under Section 54B, for the only reason that the assessee had not invested in the agriculture land, within 2 years from the date of converting the agriculture land into stock in trade, but the same was purchased once the stock in trade was sold by the assessee.

4.3. As per Section 45(2), whenever any profits and gains arise from transfer, by way of conversion of a capital asset into stock in trade, then such profits or gains, is to be charged under the head capital gains, once the stock in trade is sold. Thus, although, transfer, as per Section 2(47)(iv) [Definition of transfer], happens in the year, when the conversion is done of the capital asset into stock in trade, however, the same is chargeable to tax under the head Capital Gains only in the year in which stock in trade is sold by the assessee and consideration is received. This is for the reason that once the conversion takes place, the assessee does not receive any amount of consideration. The assessee receives the amount of consideration, for the first time, when the stock in trade is ultimately sold by it. Accordingly, the tax on such conversion, being considered as a transfer, is to be computed only when the amount is received by the assessee on sale of the stock in trade.

4.4. Similarly, for the purpose of claiming benefit of reinvestment, then the date on which investment is to be made, in a specified asset, is to be reckoned from the date when the consideration is received by the assessee on account of sale of stock in trade. 4.5. In this regard, attention is drawn towards CBDT, Circular No. 791, dated 02.06.2000, wherein, it has been specified that for the purpose of claiming benefit under Section 54EA, Section 54EC and Section 54EB, the period of six months, as specified therein, for making investment, is to be taken from the date when such stock in trade is sold or otherwise transferred, in terms of Section 45(2). The said 10 Guruvendra Singh vs. ACIT, Circle-01, Kota CBDT Circular, is reproduced here under for the sake of ready reference:- “1. Section 2(47 ) of the Income-tax Act provides that any conver-sion of capital assets into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conver-sion takes place and, accordingly, capital gain would normally arise in that very year. However, section 45(2) of the Act post-pones the assessment of such capital gains to the year in which the stock-in- trade is actually sold or otherwise transferred by the assessee.

4.6. Although, the said circular is with reference to the benefit availed by assessee is under Section 54EA, Section 54EC and Section 54EB, however, the same analogy would be applicable for the benefit claimed under any other similar section, including Section 54B.

4.7. Hon’ble Supreme Court in the case of K.P. Varghese [1981] 131 ITR 597, held that:- "A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction." (p. 598)

4.8. Attention is also drawn towards the decision of Hon’ble Allahabad High Court in the case of Janardhan Dass [2008] 299 ITR 210 (Allahabad). 4.8.i In the said case, land owned by the assessee was compulsorily acquired by the State Government in a particular year. However, the compensation on such compulsory acquisition was received in subsequent year. Assessee, in the said case, claimed benefit under Section 54B, with reference to the year in which the compensation was received by the assessee and not when the land was compulsorily acquired. 4.8.ii As per Section 2(47)(iii), Capital Asset is said to be transferred, in the year in which the same is compulsorily acquired under any law. Accordingly, the period within which the investment was to be made by the assessee, under Section 54B, was to be taken from the year in which the asset was compulsorily acquired, however, assessee in the said case, made investment for the purpose of Section 54B, within two years from which the compensation was received. The same was rejected by the Department. 4.8.iii Hon’ble High Court allowed the claim of Section 54B by holding as under:- “14. Keeping the above principle in mind, if the word "transfer" is literally interpreted it may make section 54B unworkable and may lead to absurdity. Take for example that the land is acquired and the possession is also taken for instance on 1-4- 2000, but the compensation is not paid by the acquiring body within a period of two years. The assessee/tenure-holder would not be able to avail of the advantage of section 54B by purchasing the agricultural land as provided for therein within a 12 Guruvendra Singh vs. ACIT, Circle-01, Kota period of two years. He would be deprived of the benefit of such section for no fault of his own. Section 54B is a beneficial provision for an assessee who is otherwise liable to pay income-tax under the head "Capital gains". On a conjoint reading of section 45 with section 54B, to avoid such absurdity as pointed out above, the word "transfer" should be read for the purposes of income-tax the date on which the compensation amount is paid to such assessee….” 4.9. Attention is also dawn towards the following judicial pronouncements rendered by Hon’ble ITAT, Jaipur and Ahmedabad Bench. 4.9.i Mahendra Rajnikant Zaveri, ITA No. 1117/JP/2016 Relevant Factual Position • Benefit claimed under Section 54F • Conversion of Capital Asset into Stock in Trade Held by Hon’ble ITAT “7. Admittedly, the sale consideration received beyond the date of transfer of the asset in such a factual situation the Hon'ble ITAT, Pune A Bench while deciding the ITA Nos. 594 to 597/Pn/2010 in the case of Mahesh Nemichandra Ganeshwade vs. ITO in its order dated 29th March, 2012 reported in MANU/IP/0012/2012 : (2012) 17 ITR_TRIB 116 has held, the claim of the assessee allowable. The Hon'ble Supreme Court in the case of CIT, Bangalore v. J.H. Gotla reported in MANU/SC/0126/1985 : [1985] 156 ITR 323 (SC) held that if a strict and literal construction of the statute leads to an absurd result, i.e., a result not intended to be sub-served by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then, that construction should be preferred to the strict literal construction. The Hon'ble Court has held that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. The Hon'ble Supreme Court in the case of CIT. West Bengal v. Vegetable Products Limited., Express Newspapers Pvt. Limited: Intervener & Ors. held that if two reasonable construction of taxing provision of serving that construction which favour of the assessee must be adopted. This is a well accepted rule of construction recognized by Hon'ble Supreme Court in several decisions….”

13 Guruvendra Singh vs. ACIT, Circle-01, Kota “….9 . It is also relevant to note that the sale consideration was received much after due date of filing of return of income which makes impossible for assessee to make the investments on/before due date of filing of return. On the issue of impossibility of performance to invest the amount in specified assets within 6 months from date of transfer, the CBDT appreciated such situation and has clarified that the period of 6 months for making investments in specified assets has to be reckoned from the date of the sale of such stock-in- trade when the right to collect sale consideration in such cases arose, which was much after the date of transfer as contemplated for the purpose of taxation….” 4.9.ii The Spunpipe and Construction Co. [Baroda] Pvt. Ltd. ITA. Nos. 2932/AHD/2011 and 2482/AHD/2012 Relevant Factual Position • Benefit claimed under Section 54G • Conversion of Capital Asset into Stock in Trade Held by Hon’ble ITAT “….1 5 . A perusal of the aforementioned Section shows that capital assets should be machinery or plant or building or land used for the purpose of business of industrial undertaking situate in an urban area and the transfer should be effected in the course of, or in consequences of, the shifting of such industrial undertaking to non-urban area and the long term capital gain should be utilized before one year from the date of transfer or within three years from the date of transfer…” “…16. The bone of contention is the date of transfer u/s. 2(47)(iv), it is provided-"transfer in relation to a capital asset includes- (iv) in case where the asset is converted by the owner thereof into or is treated by him as, stock-in-trade of a business carried on by him, of such conversion or treatment….” “….19. Reading all the aforementioned sections together, in our understanding of the law, means that capital gains arising out of the conversion of a capital asset as stock-in- trade, no doubt the transfer would take place on the date of conversion but the liability to pay capital gains tax will arise only in the year of sale….” “…20. Coming back to the provisions of Section 54G, the capital gains have to be utilized for the claim of deduction within a specified period. Since the capital gains has to be utilized, the logical conclusion would be the capital gains

14 Guruvendra Singh vs. ACIT, Circle-01, Kota arising on the date of sale, therefore, in our understanding of the law, although the transfer took place on 10.04.2006 but the capital gain arose on the date of sale of the capital asset….” “….2 3 . Further, it can be seen that since Section 54G is a beneficial provision and, therefore, it has to be interpreted liberally. The observations of the Hon'ble Supreme Court in the case of Sanjeev Lal and Smt. Shail Motilal (supra) are pertinent to mention here…” 2 8 . Considering the aforementioned facts in totality in conjunction with the relevant provisions of the Act discussed hereinabove, in our considered opinion, the assessee has fulfilled the mandatory conditions making itself eligible for deduction u/s. 54G of the Act….”

4.10. It is pertinent to note that the assessee, for the immediately preceding assessment year, i.e. AY 2015-16 had also claimed a similar benefit under Section 54B, wherein, the assessee had claimed Rs. 1,54,73,930 [PB : 4 to 8]. The said claim under Section 54B was allowed by the ld. AO by passing orders under Section 143(3). Accordingly, the ld. AO in the case of the assessee for the immediately preceding year had reckoned the period of investment, for the purpose of Section 54B, from the date on which the consideration was received by the assessee on sale of stock in trade. Accordingly, the view taken by the Department for the immediately preceding year should also be followed in for the year under consideration.

In view of the above, benefit of Section 54B should be given to the assessee and the period of investment, as specified therein, should be reckoned from the date on which the consideration is received by the assessee on sale of stock in trade, subsequent to its conversion. ”

AY Business Capital Gain Full Value of Cost of Exemption Exemption Income Consideration Acquisition u/s 54B u/s 54F based on (E) Valuation (F) Report (C = D-E-F- (G) (D) (B) G) (A) 2014-15 14,10,855 Nil 82,62,098 23,464 49,93,000 34,45,634 2015-16 27,87,770 Nil 2,00,04,860 56,812 1,54,73,930 44,74,118 2016-17 18,55,935 Nil 14784290 41,987 1,47,42,303 NIL

Thus, relying on the decision of Radhasaomi Satsang v. CIT (1991)

193 ITR 321 (SC) where in the apex court has held that though, the Principle of res-judicata- Strictly Res judicata does not apply to income tax proceedings. However, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order it would not be at all appropriate to allow the position to be changed in a subsequent year. Thus, the revenue should consistently apply the view that has already been taken and should be applied consistently. The ld. AR of the assessee filed the copies of the various evidences / circular and decisions so relied upon in the written submission filed as listed here in below :

COMPILATION OF CASE LAWS S. NO. CASE NAME PAGE NO.

1. Copy of Circular No.791, Dated 2-6-2000 1 Copy of order of High Court of Allahabad in the case of Janardhan 2-10 2. Dass [2008] 170 Taxman 113 (Allahabad) Copy of order of Hon’ble ITAT, Jaipur Bench in case of Mahendra 11-20 Rajnikant Zaveri Assessment Year: 2012- 3. 2013 Copy of order Hon’ble ITAT, Ahmedabad Bench in case of The Spunpipe and Construction Co. [Baroda] Pvt. Ltd. ITA. Nos. 21-29 4. 2932/AHD/2011 and 2482/AHD/2012, Assessment Year: 2008- 2009;2009-2010

Date of Hearing : 24.05.2023 S. No. Particulars Page No. 1 Copy of Return of Income along with the computation of Income, of the 1-3 assessee, for the period under consideration 2 Copy of the Assessment Order passed u/s 143(3) to the assessee, for 4-8 the AY 2015-16 3 Copy of Valuation report issued by the registered valuer regarding the 9-11 converted land. 4 Copy of Khata Girdawari Report substantiating the agriculture use of the 12-20 converted land by the assessee. 5 Copy of Report of Urban Improvement Trust (UIT), Kota substantiating 21-24 the conversion of capital asset into stock in trade.

17 Guruvendra Singh vs. ACIT, Circle-01, Kota 8. The ld. AR of the assessee based on the purchase deed in relation to agriculture land purchased by the assessee for which benefit of section 54B of the Act is claimed the along with the Girdhawari report of the agricultural land submitted that the land purchased by the assessee for which the benefit u/s 54B of the Act claimed is in fact agriculture land and the revenue has not disputed this fact but merely stated that the investment is made after 2 years.

18 Guruvendra Singh vs. ACIT, Circle-01, Kota 10. In the rejoinder, the ld. AR of the assessee differentiated this fact and submitted that the assessee claimed the asset u/s 54B of the Act is different asset and that asset is not converted into commercial asset or stock in trade. Therefore, the assessee is entitled to claim deduction and the revenue has already in the earlier order allowed part claim of the assessee. Hence, the contention of the revenue is not tenable. The ld. AR of the assessee further relying on the finding recorded in the order of ld. CIT(A) at page 9 wherein this issue has categorically been differentiated and explained that the assessee has purchased a separate agriculture land at Rs. 60,00,000/- and another at Rs. 2,62,00,000/- and in these records is duly confirmed in the remand proceedings. The AO has contended that this claim of assessee is not tenable as out of total agreed amount of Rs. 2,62,00,000/-. The assessee claimed to have paid only at Rs.1,08,12,841/- whereas as per sale agreement, the assessee has paid at Rs. 2,38,82,541/- out of total agreed amount thus, the ld. AO here does not dispute the purchase of land but only dispute that the same has not been purchased within two years. Thus, the now the issue is confined whether the assessee who have converted his agricultural land into stock in trade, the timeline for making the investment arise only

19 Guruvendra Singh vs. ACIT, Circle-01, Kota when the ultimate asset sold and offered for tax and the related time line as per provision of section 45(2) starts in the year when the assets sold.

11.1 The fact of this case is that the assessee is an individual, filed his Return of Income, for the year under consideration, at a total income of Rs 17,78,160, claiming benefit of exemption under Section 54B of the Income Tax Act, 1961 (“Act”) of Rs 1,47,42,303. As it is evident from the record that the assessee was the owner of an agricultural land, consisting of 29.0625 bighas, situated at Khasra no. – 321, Gram Sogriya, Teshil Ladpura, Kota (Rajasthan) (“the land”). Assessee, till the year 2012, was carrying out agricultural activities on the land [Khasra Girdawri Report placed at Paper Book Page 12-20]. Thereafter, in the month of October 2012, the land was converted by the assessee from agricultural to residential in nature from capital assets to stock in trade, for the purpose of selling the land, after plotting. Thus, it forms part of his Capital Asset into Stock in Trade from October, 2012. The capital gains till the date of conversion, was computed by the assessee in terms of Section 45(2) of Income Tax Act. Thereafter as, and when such stock in trade was sold to the ultimate buyer, capital gains and corresponding business income was offered for tax in the year in which such stock in trade was ultimately sold by the assessee.

The assessee has computed the gains on sale of part of the land, in the form of Capital Gains and Business Income, as per Section 45(2) of the Act is as computed here in below:-

AY Business Capital Gain Full Value of Cost of Exemption Exemption Income Consideration Acquisition u/s 54B u/s 54F based on (E) Valuation (F) Report (C = D-E-F- (G) (D) (B) G) (A) 2014-15 14,10,855 Nil 82,62,098 23,464 49,93,000 34,45,634 2015-16 27,87,770 Nil 2,00,04,860 56,812 1,54,73,930 44,74,118 2016-17 18,55,935 Nil 14784290 41,987 1,47,42,303 NIL

21 Guruvendra Singh vs. ACIT, Circle-01, Kota 11.2 For the year under consideration i.e. A.Y 2016-17, against the amount of Capital Gain, assessee claimed benefit of Section 54B of Act. Out of the money so received on sale of stock in trade, assessee invested such amount for the purpose of acquiring another agricultural land. The above factual position has not been disputed by the lower authorities and it is clear from the remand report as extracted in the order of the ld. CIT(A). Apart from the Agriculture Lands, as stated above, purchased by the assessee, in order to claim benefit under Section 54B, the assessee had also purchased residential land, for consideration of Rs. 1,22,00,000/- ld. AO rejected the claim of the assessee by stating that the assessee had not invested in the new agriculture land within the stipulated time period as provided in Section 54B of the Act and the assessment was completed, under Section 143(3) of the Act, vide order, dated 12.12.2018, wherein, the entire claim made by the assessee under Section 54B of Rs 1,47,42,303, was rejected by the ld. AO on the following reasons: i) On the one hand the assessee stated that the agricultural land sold by him and on the other submitted that the said land converted as stock in trade. ii) As the assessee converted stock in trade on 11.10.2012 has not invested the amount claimed u/s. 54B within 2 years from the said date of conversion of stock in trade.

22 Guruvendra Singh vs. ACIT, Circle-01, Kota iii) The agreement for land of Rs. 2,62,00,000/- and out of total amount Rs. 2,38,82,541/- was stated to have been received by the seller. Cost of new assets purchased as per ITR at Rs. 1,48,00,000/- whereas as per form 26QB the total amount was Rs. 21,41,207/-. The ld. AO noted that these land has been converted to residential category and thus it was not an agricultural land. iv) Assesseee has sold and purchased many properties during the year as this is his business. The amount of advance paid of the total agreed amount so that somehow the claim of 54B can be justified. v) The date of purchase of the land pertaining is for A. Y. 2018-19. vi) Against the claim of the assessee that he earns income agricultural income on that ld. AO noted that it is immaterial for the purpose of section 54B that assessee earning income from the other lands or not.

11.3 The assessee preferred an appeal against the denial of deduction u/s. 54B of the Act. Against the grounds so raised the assessee made detailed submissions before the NFAC, which have also been reproduced by the NFAC in its order from Pages 4 to 18. The NFAC, at Page 18 of its order, rejected the claim of the assessee, under Section 54B, because as per Section 54B assessee was required to purchase agriculture land, within 2 years from the date of transfer of land. Whereas, in the present case, such agricultural land was purchased after 4 years i.e. in the year 2016 from the conversion of the land from capital assets converted into stock in trade in the year under consideration. The bench noted that the Assessee made total investment of Rs.1,49,12,841 in two agriculture lands for claiming exemption against under 23 Guruvendra Singh vs. ACIT, Circle-01, Kota Section 54B against the Long-Term Capital Gain. However, exemption under Section 54B was restricted to long term capital gain earned during the year i.e. Rs.1,47,42,303. It is also noted that the assessee never utilized the amount for purchase of residential land, for the purpose of claiming benefit under Section 54B. This has been clarified before NFAC at Page 10-11 and accepted by the NFAC. Thus, the assessee had claimed benefit under Section 54B, to the extent to which the assessee was entitled to as per the provisions of the Act. The reasons advanced by the NFAC is that the assessee had not invested in the agriculture land, within 2 years from the date of converting the agriculture land into stock in trade. But the same was purchased once the stock in trade was sold by the assessee to decide the issue on hand it is worthwhile to read the provisions of section 45(1) & (2) of the Act and the same is reproduced here in below : Capital gains. 45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—

24 Guruvendra Singh vs. ACIT, Circle-01, Kota (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation.—For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938). 81[(1B) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed82.] (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.

11.4 Thus, as per provision of section 45(2), whenever any profits and gains arise from transfer, by way of conversion of a capital asset into stock in trade, then such profits or gains, is to be 25 Guruvendra Singh vs. ACIT, Circle-01, Kota charged under the head capital gains, once the said stock in trade is sold. Thus, although, transfer, as per Section 2(47)(iv) [Definition of transfer], happens in the year, when the conversion is done of the capital asset into stock in trade, however, the same is chargeable to tax under the head Capital Gains only in the year in which stock in trade is sold by the assessee and consideration is received. This is because once the conversion takes place, the assessee does not receive any amount of consideration. The assessee receives the amount of consideration, for the first time, when the stock in trade is ultimately sold. Accordingly, the tax on such conversion, being considered as a transfer, is to be computed only when the amount is received by the assessee on sale of the stock in trade. Similarly, for the purpose of claiming benefit of reinvestment, then the date on which investment is to be made, in a specified asset, is to be reckoned from the date when the consideration is received by the assessee on account of sale of stock in trade. This issue has already been clarified by CBDT vide circular No. 791, dated 02.06.2000, wherein, it has been specified that for the purpose of claiming benefit under Section 54EA, Section 54EC and Section 54EB, the period of six months, as specified therein, for making investment, is to be taken from the 26 Guruvendra Singh vs. ACIT, Circle-01, Kota date when such stock in trade is sold or otherwise transferred, in terms of Section 45(2). Although, the said circular is with reference to the benefit availed by assessee is under Section 54EA, Section 54EC and Section 54EB, however, the same analogy would be applicable for the benefit claimed under any other similar section, including Section 54B. To support this view, we take strength from the decision of Hon’ble Apex Court in the case of K.P. Varghese [1981] 131 ITR 597, where it has been held that:- "A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction." (p. 598)

11.5 Similar issue as quoted by the assessee decided by Hon’ble Allahabad High Court in the case of Janardhan Dass [2008] 299 ITR 210 (Allahabad) wherein the court allowed the claim of Section 54B by holding as under:- “14. Keeping the above principle in mind, if the word "transfer" is literally interpreted it may make section 54B unworkable and may lead to absurdity. Take for example that the land is acquired and the possession is also taken for instance on 1-4-2000, but the compensation is not paid by the acquiring body within a period of two years. The assessee/tenure-holder would not be able to avail of the advantage of section 54B by purchasing the agricultural land as provided for therein within a period of two years. He would be deprived

27 Guruvendra Singh vs. ACIT, Circle-01, Kota of the benefit of such section for no fault of his own. Section 54B is a beneficial provision for an assessee who is otherwise liable to pay income-tax under the head "Capital gains". On a conjoint reading of section 45 with section 54B, to avoid such absurdity as pointed out above, the word "transfer" should be read for the purposes of income- tax the date on which the compensation amount is paid to such assessee….”

11.6 The bench also noted that for the immediately preceding assessment year, i.e. AY 2015-16 assessee had also claimed a similar benefit under Section 54B, wherein, the assessee had claimed Rs. 1,54,73,930 [PB : 4 to 8]. The said claim under Section 54B was allowed by the ld. AO by passing orders under Section 143(3). Accordingly, the ld. AO in the case of the assessee for the immediately preceding year had reckoned the period of investment, for the purpose of Section 54B, from the date on which the consideration was received by the assessee on sale of stock in trade. Accordingly, the view taken by the Department for the immediately preceding year should also be followed in for the year under consideration. Based on these set of facts and considering the clarification issued by the CBDT vide circular no. 791 dated 02.06.2000, decision of Allahabad High Court as quoted and the non disputed fact that the similar claim of the assessee has been accepted by the revenue in A.Y 2015-16. We see no reasons to 28 Guruvendra Singh vs. ACIT, Circle-01, Kota deny the benefit of deduction u/s 54B to the assessee. Based on these observations, ground Nos. 1 & 2 raised by the assessee are allowed.

In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 07/12/2023.