Tribunal directs AO to recompute income from sale, excluding unsold area, considers Section 50C

Mekins Agro Product(P) Ltd. Versus Income-tax Officer

Mekins Agro Product(P) Ltd. Versus Income-tax Officer - TMI Issues Involved:
1. Determination of the date of capital gain.
2. Taxability of the entire sale consideration.
3. Inclusion of advances received in the sale consideration.
4. Computation of capital gain.
5. Application of Section 50C of the IT Act.
6. Understatement of sale consideration.
7. Estimation of the cost of closing stock.

Detailed Analysis:

1. Determination of the Date of Capital Gain:
The primary issue was whether the capital gain arises on the date of the development agreement or on the date of handing over the constructed area. The CIT(A) held that the capital gain arises when the constructed area is handed over, as this is when the builder obtains the right to enjoy their portion of the property. The Tribunal, however, referenced the case of Potla Nageswara Rao, concluding that the capital gains arising from the development of the land cannot be taxed in the current year if the development agreement was executed in earlier years. Hence, only the profits accrued on the sale of the built-up area during the year shall be subject to tax.

2. Taxability of the Entire Sale Consideration:
The CIT(A) upheld the AO's decision to tax the entire sale consideration in the year under consideration, including the value of the unsold constructed area. The Tribunal directed the AO to compute the profit arising from the sale of the built-up area during the year, excluding the unsold area, as only profits from transferred land and building can be taxed.

3. Inclusion of Advances Received in the Sale Consideration:
The appellant argued that advances received should not form part of the sale consideration. The CIT(A) found no concrete evidence to support the appellant's claim that the amounts were advances. The AO's verification revealed that these amounts were not reflected as liabilities in the balance sheet, and the parties involved did not show these amounts as receivables. Thus, the CIT(A) upheld the inclusion of these amounts in the sale consideration.

4. Computation of Capital Gain:
The AO quantified the sale consideration and cost of acquisition, including the value of unsold constructed area. The CIT(A) directed the AO to adopt the cost of construction, not the sale price, for calculating capital gains. The Tribunal set aside the order of the CIT(A) and directed the AO to re-compute the income, considering only the profits from the sale of the built-up area during the year.

5. Application of Section 50C of the IT Act:
The AO applied Section 50C due to discrepancies between the market value and the sale consideration admitted by the appellant. The CIT(A) confirmed the application of Section 50C, as the appellant could not offer a satisfactory explanation for the lower admitted value. The Tribunal directed the AO to consider the applicability of Section 50C and refer to the Valuation Officer if necessary.

6. Understatement of Sale Consideration:
The AO added Rs. 18,55,000/- to the sale consideration, noting a discrepancy between the amount received and the amount admitted by the appellant. The CIT(A) upheld this addition, as the appellant failed to provide evidence of the advance received. The Tribunal set aside this issue to the AO for re-examination, along with other issues.

7. Estimation of the Cost of Closing Stock:
The AO added the value of the unsold constructed area to the total cost. The CIT(A) upheld this addition, stating that the entire value of the built-up area, whether sold or unsold, is the sale consideration in lieu of 50% of the land. The Tribunal directed the AO to exclude the value of the unsold area from the computation of capital gains.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to re-compute the income, considering only the profits from the sale of the built-up area during the year and excluding the value of the unsold area. The AO was also directed to re-examine the inclusion of advances and the understatement of sale consideration, and to consider the applicability of Section 50C, referring to the Valuation Officer if necessary. The appeal of the Assessee was treated as allowed for statistical purposes.