2013 (8) TMI 557 - AT - Income Tax

Tribunal rules for appellant in tax appeal, overturns additions based on market value, stock valuation recalculated

M/s. Neelkamal Realtors and Erectors India Private Limited Versus The Dy. Commissioner of Income-tax

The appeal was partly allowed, with the Tribunal ruling in favor of the appellant on key issues. The addition made by the CIT(A) based on the difference ... Application of section 50C and 43CA of the Income Tax Act - stamp duty valuation – Held that:- On a circumspection of sub-section (1) of section 43CA, it becomes manifest that the provisions for substituting stamp value for the actual sale consideration on transfer of the land, building or both, which were earlier restricted to the capital asset' under head 'Capital gains' have now been extended to other than a capital assets' under the head 'Profits and gains of business or profession' as well. The reference to the words 'other than a capital asset' and the placement of section 43CA in Chapter IV-D indicate that the stamp value in respect of building or land or both sold by a person engaged in such business shall be substituted with the actual consideration received as a result of transfer, if the latter is lower than the former. The insertion of this provision by the Finance Act, 2013 with effect from 01.04.2014 makes it abundantly clear that the mandate of section 43CA shall apply only with effect from assessment year 2014-2015 and not before that. As the assessee in the present case is engaged in the business of selling of flats after construction, the income from which is chargeable under the head 'Profits and gains of business or profession', the provisions of section 43CA cannot apply to substitute the actual sale consideration with the stamp value in the previous year relevant to assessment year 2009-2010 under consideration - Invoking the provisions of section 50C for sustaining the addition, has no legal legs to stand on – Decided in favor of Assessee. Application of section 56(2)(vii)(b)(ii) read with section 50C of the Income Tax Act – Commissioner(Appeals) sustained the addition at ₹ 8,53,79,819 by holding that market value of flats ought to have been considered instead of the actual sale consideration – Held that:- Both the above provisions are inapplicable on the facts and circumstances prevailing in the present appeal – Assessing officer did not bring any material on record to show that the assessee in fact received higher price than declared. Under such circumstances, the action of the authorities of the Income Tax in this regard cannot be justified. Valuation of Closing stock - Addition of ₹ 13,44,81,944 on account of lower valuation of closing stock - Assessing Officer found total area of unsold flats at 31,414 sq.ft., the value of which was shown in the balance sheet at ₹ 2.03 crore. This gave rate of ₹ 647 per sq.ft. On the perusal of the profit and loss account, the Assessing Officer observed that the cost of construction was at ₹ 4928 per sq.ft. - The assessee was required to handover tenements having area of 225 sq.ft. each aggregating to 1797 sq.mtrs in the project - Vide letter dated 24.12.2012, MHADA directed the assessee to surrender the surplus Built up area admeasuring 1797.25 sq.mtr.' either in same building or in any other building in same ward only - Assessee was under obligation to hand over 1797 sq.mtrs. of built up area to MHADA as can be seen from that letter following interference by the Hon'ble Bombay High Court that both the assessee and MHADA agreed that the assessee would 'surrender the surplus built up area admeasuring 1797.25m2' – Held that:- Obligation to handover the built up area admeasuring 1797.25 sq.mtr. was on the assessee from the very beginning. At the end of the year, the built up area to such an extent could not have been considered as the assessee's stock in trade - Cost of 1797 sq. mtrs. be treated as Super built up area' and in that way, the addition deserves to be deleted – Matter restored to the file of A.O. for working out the value of the remaining closing stock – Decided in favor of Assessee. Issues Involved:1. Enhancement by the CIT(A) without issuing a show cause notice.2. Addition by treating the difference between the actual sale price and the fair market value as suppressed sale proceeds.3. Confirmation of addition on account of lower valuation of closing stock.Issue-Wise Detailed Analysis:1. Enhancement by the CIT(A) without issuing a show cause notice:- Summary: The appellant did not press this ground, and hence, it was dismissed.2. Addition by treating the difference between the actual sale price and the fair market value as suppressed sale proceeds:- Facts: The assessee, a builder and developer, declared profits from the sale of flats in a project. The Assessing Officer (AO) observed variations in the sale prices of flats and added a difference of Rs.15.22 crore, later rectified to Rs.4.45 crore. The CIT(A) sustained an addition of Rs.8.53 crore based on sections 50C and 56(2)(vii)(b)(ii).- Legal Analysis:- Section 50C: This section applies to the transfer of capital assets under the head 'Capital gains'. Since the assessee's income was under 'Profits and gains of business or profession', section 50C was deemed inapplicable.- Section 43CA: Introduced from AY 2014-15, it applies to assets other than capital assets. The Tribunal held that it does not apply retrospectively to AY 2009-10.- Section 56(2)(vii)(b)(ii): Applies to individuals or HUFs receiving property for no or inadequate consideration. It was inapplicable as:- The assessee was a seller, not a buyer.- The provision was effective from 01.10.2009, post the relevant assessment year.- The assessee was a private limited company.- Conclusion: Both sections 50C and 56(2)(vii)(b)(ii) were found inapplicable. The CIT(A)'s addition of Rs.8.53 crore was reversed. The AO's remaining addition of Rs.4.45 crore was also scrutinized. The AO had compared sale rates of different flats without substantial evidence against the assessee's explanations for price variations. The Tribunal cited Supreme Court judgments emphasizing that the burden of proving understatement lies with the Revenue, which failed to provide concrete evidence. Thus, the addition was deleted entirely.3. Confirmation of addition on account of lower valuation of closing stock:- Facts: The AO found the valuation of unsold flats at Rs.2.03 crore, significantly lower than the construction cost of Rs.4928 per sq.ft. The AO added Rs.13.44 crore, which was upheld by the CIT(A).- Legal Analysis:- The assessee was obligated to hand over 1797 sq.mtrs. of built-up area to MHADA, which could not be considered as its stock in trade.- The Tribunal noted that the obligation existed at the year-end, and the area could not be treated as the assessee's stock.- The DR's argument that the liability was contingent was dismissed, as the obligation was clear and existing.- The Tribunal held that the cost of this area should not be included in the assessee's profit from the project.- Conclusion: The built-up area of 1797.25 sq.mtrs. could not be considered as the assessee's stock in trade. The matter was remanded to the AO for recalculating the value of the remaining closing stock.Final Order:The appeal was partly allowed. The Tribunal ordered the deletion of the addition related to the sale price difference and remanded the issue of closing stock valuation for recalculation.