TaxTMI 
TaxTMI 
2014 (6) TMI 1017
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.... closing stock. It is on this ground of appeal that we have heard the parties. 3. The issue in appeal lies in a very narrow compass of material facts. The assessee before us is an individual and is engaged in the business, inter alia, as a builder in the capacity of proprietor of JV Builders. The assessee was absolute owner of a piece of land, admeasuring 1 acre and 96.22 cents, at Casa Bazar Village of Mangalore Taluk but this land, as is the unchallenged finding of the CIT(A), was held as stock in trade. It is in respect of this land that, on 7th May 2009, the assessee entered into a development agreement with Menorah Realties Pvt Ltd (MRPT, in short). Under the terms of this agreement, MRPT was to construct a residential apartment building, consisting of 24 floor and named as 'Alexandria', at its cost, and, in consideration of the land of the assessee being used for this project. MRPT was to give 40% of total saleable construed area, parking spaces and undivided interest in the said property. In effect thus, the assessee was to transfer entire landholding to this project, and, in consideration of the land being used for this housing project, receive 40% of total saleabl....
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....39;s share in the built-up area as consideration for which the land was transferred. It was in this background that the Assessing Officer computed the short-term capital gains as follows: The Short-Term Capital gain is worked out as under: Total area in square feet* 3,07,000.66 sq. ft. Assessee's share in this * 1,28,940.26 sq. ft. Cost of construction Rs. 1,654 (per sq ft) Deemed sales consideration Rs. 21,32,67,190 Less: Cost of Acquisition Rs. 6,89,65,045 Less: Cost of improvement Rs. 6,65,842 Rs. 6,96,30,887 58% of the above Rs. 4,03,85,914 Rs. 17,28,81,276 (*in the housing project) 4. Aggrieved by the addition of Rs. 17,28,81,276 so made by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without much success. While learned CIT(A) agreed that notional profit of transfer of land could indeed not be taxed as capital gains, he was of the view that it would be taxable as business profits because, as against reduction of closing stock due to transfer of interest in land, the closing stock of the assessee has to go up by the notional value of the gains inasmuch as closing stock of rights in cons....
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.... which the property in the goods is to be transferred. " 5. (1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed. (2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties." 6. (1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or future goods. (2) There may be a contract for the sale of goods the acquisition of which by the seller depends upon the contingency which may or may not happen. (3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as a agreement to sell the goods." 3.9 From the details filed by the appellant, I find that the appellant has been showing the property as stock in trade. However,....
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....entative appearing before us, the Assessing Officer is not in appeal or cross objection before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. In view of the uncontroverted findings by the learned CIT(A), it is now a settled position that the land transferred by the assessee was held as a part of stock in trade and the gains on the transfer of this land could only arise by the virtue of the increase of closing stock value in respect of the right to 42% share in the constructed building. There is no appeal or cross objection against the order passed by the CIT(A) and the learned representative state so at the bar. 8. Once the land is held to be a part of the stock in trade, it ceases to be a capital asset in view of the fact that Section 2(14), as it stood at the material point of time, specifically provided that the expression "capital asset", which means "property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw material held for the purpose of business o....
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....f the "capital asset". What holds good for transfer of a capital asset, for the purposes of triggering taxability of capital gains, is in the context of a specific legal fiction, which is introduced in the Act for a limited purpose, cannot be treated as omnibus in effect. Learned CIT(A)'s inference about "transfer" of the asset, on the facts of this case, was thus wholly incorrect. He went a step further, by compounding this error, in assuming, entirely based on this misconception about 'transfer', that since it is a case of transfer, it has to be, as he terms it, "consequent sale" as well. When there is no transfer of asset insofar as a business transaction is concerned, there is no question of 'consequences' of such a transfer. 12. Learned Departmental Representative, however, suggests that it does not make a difference because if the profit arising on transfer of land cannot be taxed as capital gains, it can be taxed as a business profit anyway. That is precisely what the learned CIT(A) has held too. 13. We are unable to see any merit in this plea either. 14. The business transaction entered into assessee, in our humble understanding, is this. The assessee....
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....ket value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question." (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded ....