2019 (2) TMI 1409 - AT - Income Tax

Tribunal Decides on Capital Gains & Tax Deductions: AY 2008-09, Section 80IB(10)

Late Puran Ratilal Mehta Through Legal Heir Madhu P Mehta, C/o Shankarlal Jauin And Associates Versus ACIT, Cir. 23 (3) And ITO 23 (1) / ACIT, Cir. 23 (3), Mumbai

The tribunal upheld the lower authorities' findings on the date of conversion of the capital asset into stock-in-trade and the computation of long-term ... Computation of long term capital gain on conversion of capital asset into stock in trade - FMV determination - HELD THAT:- CIT(A) has directed the AO to determine the fair market value of the land by obtaining cost of construction incurred by the developer. The assessee claims that M/s Bhoomi Developers has filed requisite details vide their letter dated 20-04-2011, as per which cost of construction per sq.ft. works out to ₹ 591, as against the AOs adoption of ₹ 300 per sq.ft. CIT(A) was right in directing the AO to determine the fair market value of the land by taking cost of construction incurred by the developer. Since the developer has submitted requisite details in respect of cost of construction, the AO is directed to adopt the cost of construction incurred by the developer in place of estimated construction cost taken to arrive at fair market value of the land accordingly, the ground taken by the revenue as well as the assessee are rejected. In this case, on perusal of facts, there is no doubt, whatsoever with regard to completion of project in AY 2008-09. This fact has not been disputed by the AO. Therefore, we are of the considered view that the Ld.CIT(A) was right in coming to the conclusion that the project has been completed in AY 2008-09 and accordingly, the assessee has rightly recognised revenue from the project in the year in which the project has been completed. This being so, as per the provisions of section 45(2), the capital gain derived from conversion of capital asset into stock in trade shall be chargeable to tax in the year in which such stock in trade has been sold. Since these two events, i.e. completion of project and recognition of revenue from the project has taken place in AY 2008-09, the resultant capital gain derived from conversion of capital asset into stock in trade is also taxable in AY 2008-09 - there is no reason to interfere with the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the revenue in all appeals. Disallowance of deduction claimed u/s 80IB(10) in respect of housing project - AO has disallowed deduction claimed u/s 80IB(10) on the ground that the assessee has not fulfilled the conditions laid down to claim such deduction as the commencement of construction of the housing project was started before 01-10-1998 and also the completion of the project was not complete in all respects before 31-03-2008 - HELD THAT:- The basic works carried out by the assessee including construction of compound wall and filling up of land cannot be considered as commencement of construction of the building. The said two works have been done before issue of commencement certificate by MCGM on 06-05-1998. In fact, the actual construction work has been commenced on 05-10-1998 as per the certificate of architect. AO was incorrect in observing that the project work has been started before 01-10-1998. Coming to the date of completion of project - According to the AO, the project has not been completed before 31-03-2008 as per the requirement of provisions of section 80IB(10). AO has given this finding on the sole basis of no OC certificate from MCGM. On the other hand, the assessee has filed enormous details including certificate by fire fighting department, certificate for lift operation from Municipal Corporation, architect’s certificate for completion of building on 27-11-2007, copies of possession letter issued to the buyers of the flat and also certificate of complete of civil engineer dated 14-01- 2008. On perusal of details filed by the assessee, we find that the project has been completed before 31-03-2008. Insofar as occupation certificate, though it is necessary to obtain occupation certificate from MCGM after completion of the project, in this case, on perusal of details, it is very clear that the assessee has filed an application before MCGM for issue of occupation certificate on 19- 05-2005 in case of A-Wing of the building. In RUNWAL MULTIHOUSING PVT. LTD. VERSUS ASST. COMMISSIONER OF INCOME TAX [2014 (2) TMI 595 - ITAT PUNE] had considered similar issue in the light of non issue of occupation certificate by municipal authorities and after considering relevant facts, held that when the assessee has handed over possession of the flat to the buyers, merely for non receipt of completion certificate, deduction cannot be denied. The Ld.CIT(A), after apprising all facts, held that the assessee has fulfilled conditions prescribed u/s 80IB(10) in order to be eligible for deduction for eligible profits. We do not find any error or infirmity in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the revenue. Chargeability of interest receipt from bank FD - HELD THAT:- Ratio laid down by the Hon’ble Supreme Court in the case of Totgar Cooperative Sales Society Ltd vs ITO [2010 (2) TMI 3 - SUPREME COURT] will squarely apply, where it was held that the Parliament has included specific business profit into the definition of the word ‘income’. Therefore, one is required to give a precious meaning to the words ‘Profits and gains of business or profession’. In the instant case, when we apply the ratio laid down by the Hon’ble Supreme Court in the said case, we find that interest earned on short term FD could not be said to be attributable to the activities of the assessee, mainly carrying on the business of construction and development of flats. Therefore, we are of the considered view that the AO was right in assessing interest earned on FDR under the head ‘Income from other sources’. CIT(A), without appreciating these facts directed the AO to assess interest under the head ‘Income from business or profession’, as claimed by the assessee. Hence, we reverse the finding of the Ld.CIT(A) and restore the assessment of interest income under the head ‘Income from other sources’. Issues Involved:1. Date of conversion of capital asset into stock-in-trade.2. Computation of long-term capital gain on conversion.3. Year of taxability of long-term capital gain.4. Eligibility for deduction under section 80IB(10).5. Taxability of interest income from bank fixed deposits (FDs).Detailed Analysis:1. Date of Conversion of Capital Asset into Stock-in-Trade:The primary issue was determining the date of conversion of the capital asset into stock-in-trade. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the conversion took place on 02-02-1994, when the assessee filed an application for obtaining Intimation of Disapproval (IOD) from the Municipal Corporation of Greater Mumbai (MCGM). Despite the assessee's argument that the conversion should be considered in AY 1998-99 when the IOD was issued, the tribunal upheld the lower authorities' decision, emphasizing the intention to convert the asset as the determining factor.2. Computation of Long-Term Capital Gain on Conversion:The AO computed the long-term capital gain by taking the ready reckoner rate of constructed flats as on 02-02-1994 and reducing the estimated cost of construction to arrive at the market value of the land. The CIT(A) directed the AO to determine the cost of construction based on actual costs incurred by the developer, M/s Bhoomi Developers, rather than the estimated cost. The tribunal upheld this direction, noting that the developer had provided the requisite details, and the AO should use the actual cost of construction to compute the fair market value of the land.3. Year of Taxability of Long-Term Capital Gain:The AO taxed the long-term capital gain proportionately from AY 2001-02 to 2006-07 based on advances received from customers. However, the assessee argued that the revenue should be recognized in AY 2008-09 when the project was completed. The tribunal agreed with the assessee, noting that the project was completed in AY 2008-09, and as per section 45(2) of the Income-tax Act, 1961, the capital gain should be taxed in the year in which the stock-in-trade is sold. Thus, the tribunal upheld the CIT(A)'s decision to tax the capital gain in AY 2008-09.4. Eligibility for Deduction under Section 80IB(10):The AO disallowed the deduction under section 80IB(10) on the grounds that the project commenced before 01-10-1998 and was not completed by 31-03-2008. The CIT(A) negated this, stating that the project commenced on 05-10-1998 and was completed before 31-03-2008, supported by various certificates and documents. The tribunal upheld the CIT(A)'s findings, noting that the actual construction commenced on 05-10-1998 and the project was completed on time, despite the lack of an occupation certificate due to legal hurdles.5. Taxability of Interest Income from Bank FDs:The AO assessed the interest earned on FDs under the head 'Income from other sources,' while the assessee claimed it as business income. The tribunal agreed with the AO, stating that the interest income from FDs, derived from surplus funds not immediately required for business, should be assessed as 'Income from other sources.' The tribunal reversed the CIT(A)'s decision, which had favored the assessee based on a precedent that was not applicable to the facts of this case.Conclusion:The tribunal upheld the lower authorities' findings on the date of conversion of the capital asset into stock-in-trade and the computation of long-term capital gain. It agreed with the assessee on the year of taxability of the capital gain, recognizing it in AY 2008-09. The tribunal also upheld the CIT(A)'s decision on the eligibility for deduction under section 80IB(10) but reversed the CIT(A)'s decision on the taxability of interest income from bank FDs, assessing it under 'Income from other sources.'