MADDIMISETTI SRINIVASU,TANUKU vs. THE ASST . COMMISSIONER OF INCOME TAX,CIRCLE-1, RAJAHMUNDARY

This appeal is filed by the assessee against the order of the Principal Commissioner of Income Tax [in short, [PCIT], Visakhapatnam-1 in DIN & Order No.ITBA/REV/F/REV5/2021-22/1040774967(1) dated 15.03.2022 for the Assessment Year (A.Y.) 2017-18.

Brief facts of the case are that the assessee is an individual, filed his return of income for the A.Y.2017-18 on 30.08.2017, admitting a total income of Rs.26,84,160/- under the heads ‘income from capital gains’ and 2 A.Y.2017-18 Maddimsetti Srinivasu.,Komaravaram ‘other sources’. The case was selected for scrutiny under CASS to verify the issue of ‘high value of cash withdrawals during the year’. Accordingly, notices u/s 142(1) and 143(2) of the Income Tax Act, 1961 (in short ‘Act’) were issued and served on the assessee, calling for certain information to verify the above issue. In response, the assessee had submitted the information online and the assessment was completed u/s 143(3) of the Act on 20.12.2019, accepting the income returned by the assessee. Under the powers vested with the PCIT, as per the provisions of section 263 of the Act, the assessment records in the case of the assessee for the A.Y.2017-18 were called for and the same were examined. The Ld.PCIT observed from the assessment record that the assessee during the previous year relevant to the A.Y.2017-18 converted the agricultural land (capital asset) situated in the municipal area of Tanuku Revenue Mandal with Registered Survey No.846/2 into stock in trade for sale of developed plots. The Ld.PCIT observed that as per section 45(2) of the Act, 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 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 purpose 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. The Ld.PCIT further observed that the assessee had sold 16 plots admeasuring 3078.70 sq.yds for a total consideration of Rs.2,31,16,000/- during the previous year relevant to the A.Y.2017-18. The assessee had computed long term capital gains (LTCG) of Rs.1,22,09,363/- and offered taxable LTCG of Rs.26,84,183/- after claiming deduction u/s 54F of the Act. The Ld.PCIT viewed that the income ought to have been offered under the head ‘income from business or profession’. The Ld.PCIT observed that the conversion of capital asset into stock-in-trade and subsequent sale of plots out of the stock-in-trade took place in the same financial year 2016-17 relevant to the A.Y.2017-18. Accordingly, incidence of taxation attracts in two occasions viz. i) arising of capital gains on conversion of capital asset into stock-in-trade and ii) on the sale of plots out of stock-in-trade as business income as evident from the Profit and Loss account. However, the AO omitted to examine the same and passed assessment order. Thus, held that the assessment order passed u/s 143(3) of the Act on 20.12.2019 is prima facie erroneous in law and prejudicial to the interest of the revenue, therefore, proposed for revision u/s 263 of the Act and accordingly issued show cause notice dated 15.02.2022 as to why the assessment order u/s 143(3) should not be revised. Since there was no compliance from the assessee, in the interest of natural justice, the assessee was afforded another opportunity vide letter dated 26.02.2022 and informed of the consequences for non-compliance that the revision order would be passed ex-parte based on the material available on record. Since there was no compliance from the assessee, the Ld.PCIT passed revision order based on the material available on record. The Ld.PCIT held that the assessment completed for the A.Y.2017-18 u/s 143(3) of the Act dated 20.12.2019 is not only erroneous but also prejudicial to the interest of revenue. The Ld.PCIT set aside the assessment to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) of the Act as well as business income of the assessee on sale of plots with reference to the issue of sale of plots during the period relevant to the A.Y.2017-18. The Ld.PCIT directed the AO to afford an opportunity of being heard to the assessee before passing the consequential order.

On being aggrieved, the assessee preferred appeal before the Tribunal and raised the following grounds :

Ground No.1 and 5 are general in nature which does not require specific adjudication.

Ground No.2 to 4 relate to invoking provisions of section 263 for revision of the assessment. The Ld.AR argued that the assessment order passed is neither erroneous nor prejudicial to the interest of the revenue, as the AO passed assessment order after causing enquiries and the provisions of section 45(2) of the Act are not applicable to the assessee.

Per contra, the Ld.DR argued that the Ld.PCIT has rightly concluded that the assessment order passed is erroneous and prejudicial to the interest of the revenue, as the AO has not examined the quantum of capital asset converted into stock-in-trade and the sale proceeds realised out of stock-in-trade i.e. from the sale of developed plots made during the F.Y.2016-17 relevant to the A.Y.2017-18 which required to be assessed as 6 A.Y.2017-18 Maddimsetti Srinivasu.,Komaravaram business income of the assessee for the A.Y.2017-18. The Ld.DR further submitted that the Ld.PCIT is justified in setting aside the assessment to the file of the AO for verification of the incidence of capital gains and business income after giving opportunity of being heard to the assessee. Hence, requested to uphold the order of the Ld.PCIT and dismiss the appeal of the assessee.

We have heard both the parties, perused the material placed on record and orders of the lower authorities. It is undisputed fact that the assessee had converted the agricultural land into stock-in-trade and plotted it as residential plots. The assessee sold the residential plots as is evident from the registered sale deeds and the stamp duty paid on such sale of residential plots and the very nature and purpose of the land has been changed from agriculture to residential. It is apparent that the conversion of capital asset into stock-in-trade and subsequent sale of plots out of the stock-in-trade took place in the same financial year 2016-17 relevant to the A.Y.2017-18, which attracts tax on arising of capital gains on conversion of capital asset into stock-in-trade and on sale of plots out of stock-in-trade as business income, as evident from the profit and loss account. The Ld.AO has not examined this issue during the assessment proceedings. Hence, we are of the view, that the Ld.PCIT has rightly set aside the assessment to the file of the AO for verification of the capital gains in accordance with the provisions of section 45(2) of the Act and the business income of the assessee on sale of plots. We find no infirmity in the order passed by the Ld.PCIT and we are of the firm view that the Ld.PCIT has rightly initiated the proceedings u/s 263. Therefore, we uphold the order of the Ld.PCIT to remit the matter back to the file of the AO to verify the two issues and pass consequential order, after giving opportunity of being heard to the assessee. The assessee is also directed to cooperate with the department and produce the documents required for verification and adjudication of the issues.

In the result, the appeal of the assessee is allowed for statistical purpose.