Tribunal cancels reassessment, upholds capital asset conversion, determines tax year

The Tribunal allowed both appeals of the assessee, canceling the re-assessment for the assessment year 2003-04 due to the absence of a notice under Section 143(2). It upheld the conversion of the capital asset into stock in trade under Section 45(2) and determined the year in which the capital gain is chargeable to tax. The Tribunal directed the cost of acquisition of the land for computing long-term capital gains and the sale consideration for computing capital gains. The decision was pronounced on 22nd June 2012.

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Issues Involved:
1. Validity of re-assessment under Section 143(3) read with Section 147 without issuing notice under Section 143(2).
2. Conversion of capital asset into stock in trade under Section 45(2).
3. Determination of the year in which capital gain is chargeable to tax.
4. Cost of acquisition of the land for computing long-term capital gains.
5. Determination of sale consideration for computing capital gains.

Issue-wise Detailed Analysis:

1. Validity of Re-assessment under Section 143(3) read with Section 147 without issuing notice under Section 143(2):
The assessee challenged the validity of the re-assessment made by the AO for assessment year 2003-04 on the grounds that no notice under Section 143(2) was issued during the re-assessment proceedings. The Tribunal noted that the Revenue did not dispute this fact. The Tribunal relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Ms. Malavika Arun Somaiya, where it was held that the absence of notice under Section 143(2) renders the re-assessment invalid. Consequently, the Tribunal canceled the re-assessment for assessment year 2003-04, rendering other grounds for that year infructuous.

2. Conversion of Capital Asset into Stock in Trade under Section 45(2):
The Tribunal examined whether the assessee had converted the land into stock in trade for the purpose of real estate business. The assessee provided evidence of steps taken before entering into the Development Agreement, such as obtaining necessary approvals and certificates. The Tribunal referred to the case of Vidhyavihar Containers Ltd., where similar steps were considered sufficient to establish that the real estate business was commenced and carried on. The Tribunal concluded that the conversion of land into stock in trade on 15-05-2002 was valid under Section 45(2).

3. Determination of the Year in which Capital Gain is Chargeable to Tax:
The Tribunal held that the capital gain arising from the transfer of land by way of conversion into stock in trade is chargeable to tax in the year in which the stock in trade is sold, as per Section 45(2). The sale of stock in trade was recognized by the assessee in the previous year relevant to assessment year 2005-06 when the consideration in the form of constructed area was received. The Tribunal, following the decision in the case of Crest Hotels Ltd., held that the capital gain is chargeable to tax in assessment year 2005-06.

4. Cost of Acquisition of the Land for Computing Long-term Capital Gains:
The assessee had taken the cost of acquisition of the Sanpada land at Rs.1,07,90,000/-, being 83% of the market value on the date of allotment. The AO took the cost as Nil, while the CIT(A) took it at Rs.52,000/-. The Tribunal referred to the case of Atul G. Puranik, where it was held that the market value of the land on the date of allotment should be considered as the cost of acquisition. The Tribunal directed the AO to take the cost of acquisition at Rs.1,07,90,000/-.

5. Determination of Sale Consideration for Computing Capital Gains:
The assessee had taken the fair market value of the land at Rs.2,49,00,000/- on the date of conversion as the full value of consideration for computing capital gain. The Tribunal, referring to Section 45(2), held that the fair market value on the date of conversion should be deemed as the full value of consideration. The Tribunal directed the AO to adopt the fair market value of Rs.2,49,00,000/- as the full value of consideration for computing capital gain.

Conclusion:
Both appeals of the assessee were allowed, with the Tribunal providing a detailed analysis and directions on each issue, ensuring compliance with relevant legal provisions and precedents. The Tribunal's decision was pronounced on 22nd June 2012.

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