NEW DELHI AUTO FINANCE PVT. LTD.,NEW DELHI vs. ACIT, CIRCLE- 18(1), NEW DELHI

The assessee company had not filed the return of income voluntarily and consequent to a search and seizure operation in the business premises of the assessee company and at the residence of Shri J.B. Aggarwal, Director, it was found that the assessee company had received compensation and interest on compensation from the acquisition of land during the FY 1996-97. Therefore, finding escapement of income, notice for reopening u/s 148 of the Act was issued. The assessee had claimed that no amount was received by the company in its bank account from the Land Acquisition Officer during the year under assessment. The same was said to be subjudice. The AO considered the land to be non-agricultural and after considering the dispute as to who is liable to account for this income by way of compensation, proceeded to add in the hands of the assessee company. The order was sustained by the ld.CIT(A) and ultimately reached this Tribunal and by ITA No.2128/Del/2003, order dated 11th January, 2008, the matter was remitted back to the ld.CIT(A) for deciding the matter of taxation of capital gains denovo after considering whether: (i) the land was agricultural land or not; and (ii) if not, whether the capital gains could be taxed on the basis of constructive receipt or not under the provisions of section 45(5) of the Act. The taxability of agricultural land will be decided thereafter by taking into account the fact that being a company it has to maintain the account following the mercantile system of accounting under the Companies Act. 3

Now, by the impugned order, the ld.CIT(A) has concluded that the land is very much a capital asset as per the provisions of section 2(14) of the Act, but, with regard to the question if the capital gains should be taxed on the basis of the constructive receipt or not, the ld. CIT(A) has restored the matter to the files of ld. AO to tax the profits under the head of capital gains for the year when the assessee would receive sale proceeds on the basis of the decision of the district court.

Before us, the whole case of the assessee as canvassed was that the land is agricultural land in nature. In this context, the relevant findings of the ld.CIT(A) in paras 4.2 to 5.10 are reproduced below:- “4.2 I have carefully considered the facts of the case, the submissions of the appellant and the order of Hon'ble ITAT.

3 At the outset, the facts of the case are that the land of the assessee company was acquired by the NOIDA on 31.03.1992 and the award was passed by the Additional District Collector on 12.08.1996. However, in view of the litigation between the directors, the compensation and interest were deposited in the Revenue Deposit account in August, 1996. The AO held that the compensation, solatium and interest had accrued and arisen to the assesse company as soon as the award was made and the amount had been deposited in revenue deposit account by the Additional District Collector. The compensation and interest accrued to the assessee company on 25.10.1996 when the money was deposited in the revenue deposit account.

4 The assessee claimed that it was following cash system of accounting and therefore, since the amount was not received, it could not be taxed in the hands of the assesse company till the matter was finally decided by the district Judge on the reference made by the Additional District Collector. This argument did not find favour with the AO. AO held that the taxability of interest is not governed by the method of accounting followed by the assesse, which has to be taxed on accrual basis as held by Hon'ble Delhi High Court in the case of CIT vs. DevkiNandan& Sons, 125 ITR 225. Such was also the decision of Hon'ble Supreme court in the case of Smt. Rama 4

6 The Ld. CIT(A) agreed with the AO that the interest income accrued from day-to-day and therefore, it cannot be taxed on receipt basis. In his appellate order, the Ld. CIT(A) pointed out that on perusal of various case laws, the intention of the appellant was of prime importance in determining the nature of investment made by the assesse. Ld. CIT(A) held that  since it was admitted that the land had been purchased for commercial exploitation, therefore, the land was held as stock-in- trade.  any income on sale of stock in trade has to be assessed as business income.  Income in this case has accrued to the assessee company irrespective of its receipt due to dispute among the directors

7 Thus, the Ld. CIT(A) held that the income on sale of land held as stock in trade was liable to be taxed in the instant assessment year as business income.

8 The assessee filed an appeal before Hon'ble ITAT claiming that the purpose of developing the land into farm houses was frustrated due to failure in getting permission from NOIDA and therefore, the agricultural land initially held as stock- in-trade did not continue to be so and became investments in the hands of the assesse, Further, the assessee claimed that since the land was agricultural land, it was not a capital asset u/s 2(14) of the Act. In view of the aforesaid claim of the assessee, the Hon'ble ITAT set aside the matter to CIT(A). The relevant extracts of the ITAT order are as under:

Whether the land was agriculture land or not?

1 On perusal of the assessment order dated 27.03.2002, it is seen that the land in question comprised of the following Khasra Nos in village ChhalleraBangar (Distt. GautamBuddh Nagar, U.P):

2 These lands were acquired by the Additional District Collector while declaring award in respect of this land on 12.08.1996. 5.3 It may be relevant to refer to Section 2(14) of the Income Tax Act which defines "capital asset" as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- 6