2016 (8) TMI 762 - AT - Income Tax

Tribunal directs AO to verify school building costs, refers property valuation to DVO for capital gains tax.

The Tribunal partly allowed the assessee's appeal, directing the AO to verify the ownership and construction costs of the school building and refer the ... Transfer within the meaning of Section 2(47) - capital asset as defined in Section 2(14) - capital gains chargeable under Section 45 - stock-in-trade - Section 50C(2) reference to Departmental Valuation Officer - family settlementTransfer within the meaning of Section 2(47) - capital gains chargeable under Section 45 - Exchange of plots between the assessee and Vatsalabhai Dattatray Sawant Charitable Trust is a transfer exigible to capital gains tax. - HELD THAT: - The Tribunal examined the factual matrix and documentary record showing that the assessee exchanged the property by deed dated 03-06-2008. The transaction falls squarely within the statutory definition of 'transfer' which includes 'exchange' under Section 2(47). The exchange resulted in the assessee parting with ownership of the asset held by it and acquiring another immovable property in return. Given that the asset was held as a capital asset (see reasoning on intention and use), the exchange triggers liability to capital gains tax under Section 45. The Tribunal rejected the contention that the transaction is immune from tax on the ground of being a family settlement with a public charitable trust, noting that a public charitable trust exists for public objects and restrictions on diversion of its property preclude treating such exchanges as intra-family settlements that avoid transfer-tax consequences. [Paras 9]The exchange constitutes a 'transfer' within the meaning of Section 2(47) and is exigible to capital gains tax under Section 45.Capital asset as defined in Section 2(14) - stock-in-trade - The property held by the assessee was a capital asset and not stock-in-trade. - HELD THAT: - On the evidence, including the manner of acquisition, possession and use of the plot (occupation by a school run by a charitable trust since c.1990), absence of Balance Sheets or other cogent material showing trading activity in land or construction business, and the circumstances of acquisition (payments in 1996 and 2001 with Charity Commissioner approval in 2004 and conveyance in 2006), the Tribunal found that the assessee had not discharged the onus of proving that the land was held as stock-in-trade. The surrounding facts indicate the asset was acquired and held in the nature of a capital asset rather than as inventory or for trading/development as a business. [Paras 9]The plot exchanged by the assessee is held as a capital asset within Section 2(14) and not as stock-in-trade.Section 50C(2) reference to Departmental Valuation Officer - stamp duty valuation - Stamp duty valuation adopted by revenue requires verification by DVO under Section 50C(2). - HELD THAT: - The assessee contested the stamp duty valuation relied upon by the authorities, pointing to alleged over-valuation and differences in components (land versus constructed area). The Tribunal considered these contentions to have merit on the issue of correct valuation for capital gains computation and held that the matter should be referred to the Departmental Valuation Officer in terms of Section 50C(2) so that a detailed valuation report may be obtained and the valuation dispute adjudicated afresh. The assessee must be permitted to place relevant evidence before the AO and the DVO, and be heard in accordance with law. [Paras 9]Issue remitted to the Assessing Officer to refer valuation to the DVO under Section 50C(2) and to adjudicate valuation on merits after affording the assessee opportunity to produce evidence.Ownership of building - verification of construction cost - Ownership of the building and the question whether the structure was owned by the trust or by the assessee requires verification. - HELD THAT: - The Tribunal noted a presumption from the exchange deed that the assessee had constructed the structure transferred, but also recorded that the assessee produced approvals and other documents later which were not considered at earlier stages. Given absence of cogent evidence (balance sheets, construction invoices, bank payments) before the authorities to establish ownership and construction cost, the Tribunal set aside the issue for de novo enquiry by the AO. The AO is directed to verify, examine and enquire into the claim that the building was owned by the trust and to permit the assessee to produce all relevant materials, including additional evidence placed before the Tribunal, with full opportunity of being heard. [Paras 9]Issue remitted to the Assessing Officer for verification of ownership and construction costs, with directions to admit and examine relevant evidence and to decide afresh after hearing the assessee.Final Conclusion: The Tribunal upholds that the exchange of plots is a 'transfer' within Section 2(47) and the property was held as a capital asset, rendering the transaction exigible to capital gains under Section 45 for AY 2009-10; however, the valuation issue (including invocation of Section 50C) and the question of ownership/extent of the building are set aside for fresh adjudication by the Assessing Officer, including referral to the DVO under Section 50C(2) and permitting the assessee to lead evidence. Issues Involved:1. Whether the exchange of plots constitutes a transfer of capital asset under Section 2(47) of the Income Tax Act, 1961.2. Whether the land was held as a capital asset or stock-in-trade.3. Applicability of Section 50C of the Income Tax Act, 1961.4. Determination of the correct valuation of the property for capital gains tax purposes.5. Whether the exchange was a bona fide family settlement exempt from tax.Issue-wise Detailed Analysis:1. Exchange of Plots as Transfer of Capital Asset:The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the exchange of plots between the assessee and Vatsalabhai Dattatray Charitable Trust constituted a transfer of capital asset under Section 2(47) of the Income Tax Act, 1961. The AO observed that any exchange of an asset is a transfer within the meaning of Section 2(47) and the gains arising from such transfer are chargeable to tax under Section 45(1). The CIT(A) upheld this view, noting that the exchange was a transfer of land within the meaning of Section 2(47) and gains arising from it are chargeable to tax under Section 45.2. Land Held as Capital Asset or Stock-in-Trade:The assessee claimed that the land was held as stock-in-trade and not as a capital asset. However, the AO and CIT(A) rejected this claim, noting that the assessee did not submit balance sheets or documents to support the contention that the land was held as stock-in-trade. The CIT(A) observed that the land was acquired for the benefit of the school's development, and the assessee was not engaged in the business of construction or real estate. Thus, the land was held as a capital asset under Section 2(14) of the Act.3. Applicability of Section 50C:The AO applied Section 50C, which mandates that the value adopted by the stamp duty authorities for the purpose of stamp duty should be considered as the sale consideration for computing capital gains. The AO treated the sale value consideration at Rs. 1,30,89,000/- as per Section 50C and brought it to tax as long-term capital gains. The CIT(A) upheld this application, rejecting the assessee's bifurcation of the market value into land and building components.4. Valuation of Property:The assessee argued that the market value of the land received in exchange was inflated due to issues like encroachments and lack of approach roads. The Tribunal noted that the assessee had not objected to the stamp duty valuation during the assessment. However, the Tribunal allowed the plea to refer the matter to the Departmental Valuation Officer (DVO) under Section 50C(2) to determine the correct valuation of the property, considering the assessee's contention that the valuation was excessive.5. Bona Fide Family Settlement:The assessee contended that the exchange was a bona fide family settlement and should not be taxed. The Tribunal rejected this contention, noting that Vatsalabhai Dattatray Charitable Trust is a public charitable trust and not a family enterprise. The trust exists for public welfare and not for the benefit of trustees or their relatives. Thus, the exchange of properties between the assessee and the trust could not be considered a family settlement exempt from tax.Conclusion:The Tribunal partly allowed the assessee's appeal, directing the AO to verify the ownership and construction costs of the school building and refer the valuation of the property to the DVO. The AO was instructed to de-novo adjudicate the issue on merits, considering the Tribunal's observations, the DVO's report, and relevant evidence provided by the assessee. The Tribunal upheld the view that the exchange of plots constituted a transfer of capital asset and was exigible to capital gains tax under Section 45 of the Act.