TaxTMI 
TaxTMI 
2010 (1) TMI 877
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.... started some where in the assessment year 1999-2000. The accounts for all the three constructions were kept separately but at the end, a combined profit and loss account and balance sheet have been prepared in respect of all the three constructions at the end of the accounting year. During the previous year the construction of building Eternia B was completed and flats were sold to the purchasers. The assessee filed a return of income on 31st Oct., 2001 declaring a loss of Rs.5,96,756/-. Subsequently during the course of assessment proceedings the assessee filed a revised profit and loss account. The AO completed the assessment at a total income of Rs.3,32,90,170/-. The capital gains to the assessee on the sale capital assets which were subsequently converted into stock in trade, was computed at Rs.1,87,70,701/- and the profit from business on completion of Eternia B Project was computed at Rs.1,24,25,705/-. The AO was of the view that the capital gains on the proportionate land pertaining to the Building Eternia B, which was completed and sold, were to be shown as income during the year. The assessee contended that there was no sale of land as no conveyance of sale deed was execu....
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....ided by a qualified Chartered Accountant that assessee has not been able to prove bonafide of its explanation before the A.O." 4. Mr. L.K. Agarwal, learned DR, submitted that the assessee was following project completion method and it had three projects on hand and was maintaining separate accounts for each of the project and when the undisputed fact is that one of the project is completed, the assessee was required to declare both the capital gains as well as the profits of that project, especially when the flats in that projects were sold and that failing to do so accounted to concealment of income as well as furnishing of inaccurate particulars of income. He drew the attention of the Bench to para 12 page 9 of the order of the H-Bench of the Mumbai Tribunal in the quantum proceedings in ITA No.7381/Mum/204 and submitted that the Tribunal has held that the provisions of section 2(47) are attracted in this case which provide for certain transactions to be treated as transfer for the purpose of computation of capital gains. He pointed out that the Tribunal has held that the profit arising on conversion of capital receipt into stock in trade, is assessable to tax in terms of....
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....ct and such a belief was based on a written opinion of a senior Advocate. The learned counsel submitted that it was wrong on the part of the AO to state that the assessee maintained separate books of account for each project and this is evidenced from the order of the Tribunal wherein it is recorded that only when the AO express the view that income was to be assessed on the basis of each building, the assessee prepared separate income and expenditure account on the particular building. He vehemently contended that land, which is a capital asset of the assessee, was converted into stock-in-trade and what was sold was only the structure over the proportionate land underneath Eternia B and the land was never sold. He pointed out that the land would be transferred only to a society and then only the provisions of section 45(2) would come into play. He pointed out that the assessee had sold the land during the financial year 2005-06 and had offered the entire capital gain in the assessment year 2006-07. He pointed out that the AO assessed the capital gains in the year 2006-07 resulting in double taxation. He pointed out that a Senior Advocate in a written opinion had stated that the Re....
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....m the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stockin- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." (Emphasis ours). 9. The issue whether the sale of stock-in-trade, which is not a capital asset, is governed by section 2(47) or not is a debatable legal issue. Sub section (2) of section 47 deals with transfer in relation to a capital asset and does not deal with transfer in relation to stock-in-trade. This is the opinion expressed in writing by a Senior Advocate Mr. Sohrab E. Dastur on a query from the assessee. The Senior Advocate opined that the Revenue cannot place reliance on section 2(47)(v) because the said provisions defines transfer in the context of a capital asset, whereas section 45(2) comes into play when what is transferred is stock-in-tr....
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....ice, the question of his failure to discharge his burden in terms of explanation appended to Section 271(1)(c) of the Income Tax Act would not arise." 11. Applying these propositions to the facts of the case, the assessee has given a bonafide explanation, and this explanation has not been held to be false by the Revenue and under such circumstances, no penalty can be levied u/s 271(1)(c). 12. Coming to the decision of Dhamendra Textiles Processors (supra) relied upon by the Revenue, the only proposition laid down therein as per our humble opinion, is that levy of penalty under Income Tax Act is a civil liability. The proposition that levy of penalty is not automatic and that it is discretionary, has not been over turned by this decision. In fact the Hon'ble Supreme Court in a later decision in the case of Union of India vs. Rajastan Spinning and Weaving Mills, Civil Appeal No. 2527 of 2009, 23 DTR (SC) 158 clearly stated that the decision in the case of Dhamendra Textile Processors must be understood to mean that though application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is appl....