TaxTMI 
TaxTMI 
2019 (4) TMI 852
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....ng with his brother Shri C. Seetharam Babu, had purchased 24,960 sft of converted land (agricultural land converted to non-agricultural land) in survey No.16, situated at Anantapura Village of Bangalore vide Registered Sale Deed Document No.3153/2011-12, dated 07.09.2011 and that he had held it as a capital asset as on 31.03.2012, but converted the same to stock-in-trade in his books of account in the financial year 2012-13, and that in the same financial year, the assessee and his brother entered into a registered joint development agreement vide document No.779/2012-13 dated 16.05.2012 with M/s. Sri Sai Developers, Bangalore. He observed that as per Para 5 of the JDA, the assessee and his brother are entitled to 39% of the undivided share of land; super built up area and car parking area etc., while the Developer was entitled to 61% of the undivided share of land, super built up area and car parking area etc. He observed that the conversion of capital asset into stock-in-trade and entering into JDA is in the same year and therefore, attracts the provisions of section 45(2) of the Act. Therefore, he was of the opinion that the assessee ought to have offered the short term capital ....
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....al flats, out of which, 22 were sold in the financial year 2012-13, and the remaining flats were sold in the subsequent years. However, the new provision u/s 23(5) is applicable only w.e.f. 1.4.2018 and therefore, the said income cannot be brought to tax in the A.Y 2013-14. 4. The Pr. CIT considered the above objections of the assessee and held that: i) The provisions of section 45(2) speaks about capital gain arising out of the transfer by way of the conversion of the capital asset into stock-in-trade which shall be chargeable to Income Tax in the previous year in which such stock in trade is sold or otherwise transferred by him. The CIT held that since the assessee has entered into JDA in the same financial year in which the capital asset was converted into stock-in-trade, as the assessee and his brother transferred the rights to exploit the stock in trade for construction of multi-storied building and therefore short term capital gain has accrued to the assessee in the previous year, relevant to the A.Y 2013-14. With regard to the computation of short term capital gain, he held that the difference between the fair market value of 61% of the share of the land on the date of con....
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....-05-2012 is taxable for the A.Y 2013-14 on the ground of Mercantile System of accounting followed by the Appellant without appreciating the fact that the taxability of Capital Gain arises in the previous year in which the stock in trade was sold and not in the year of JDA. 6. The Ld. PCIT has erred in holding that the taxable Business income is the difference between 39% of the Cost of Construction of the project to the Developer and the FMV of 61 % of the Land on the date of conversion of Capital Asset into Stock in trade in the A.Y 2013-14 without appreciating the fact that the Business Income is chargeable to tax in the previous year in which the stock in trade was sold and not in the A.Y 2013-14. 7. The Ld. PCIT has not appreciated the fact that the Appellant has voluntarily declared the business income in the A.Y 2016-17 relating to the JDA entered into with M/s. Sai Developers. 8. The Ld. DIT has erred in holding that the notional rent being income from House Property of 2 unsold vacant flats received from M/s. D.M. Builders is chargeable to tax in the A.Y 2013-14 without appreciating the fact that the new provision of section 23(5) was applicable for the A.Y 2018- 19 onwa....
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....ssment and therefore the Assessment order dtd: 31-03- 2016 said to have been made on protective basis is not maintainable in law in the absence of the corresponding Substantive Assessment for the same Assessment Year 2013-14. In this regard the Appellant has filed an Appeal on the above ground amongst other grounds, before the Ld. CIT(A), Kurnool and the Appeal so filed is pending for adjudication. 5 The Appellant submits that during the pendency of the Appeal against the Protective Assessment Order dtd: 31-03- 2016 u/s. 143(3) of the Act for the A.Y 2013-14, the Ld. Pr. CIT Kurnool, has issued a Show Cause Notice dtd: 10-01- 2018 and called upon the Appellant to show cause as to why the Assessment Order dtd: 31-03-2016 should not be set aside as it was held to be erroneous and prejudicial to the interest of Revenue on the following grounds:- . i. The Short Term Capital Gains arising out of the deemed transfer of 61 % of the Land in favour of the Developers M/s. Sai Builders in the Scheme of JDA dtd: 16-05-2012 relating to the land situated at Sy. No. 16, Ananthapura Village, Yellahanka Hobli, amounting to Rs. 2,27,462/- was found to be erroneous as per the provisions of section ....
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....1e previous year 2015-16 relevant to the A.Y 2016-17 for which the Capital Gains stands deferred and therefore the Proposal u/s 263 is not justifiable. 4. The Assessee further submits that the Capital Asset was converted into Stock in Trade for the previous year 2012-13 relevant to the A.Y 2013-14 and the exigibility of STCG or LTCG arises only in the year of Sale of such converted Stock in Trade. "he Assessee submits that the Assessee was entitled to the 39% of tne Super Built up area as per the terms of JDA and such Built up area was sold in the Previous year 2015-16 relevant to the A.Y 2816-17 and hence the Chargeability of L TCG u/.s. 45(2) of the Act is not at all applicable for the A.Y 2013-14 and the same is applicable for the A.Y 2016-17. Therefore this issue cannot be considered as a ground for setting aside the Original Assessment u/s. 263 as proposed in the Show cause Notice dtd: 10-01-2018. 5. Business Income:- The Assessee submits that in the show cause notice it was proposed that the Business income is computable u/s. 2(47)(v) of IT Act r.w.s 53A of TP Act which is applicable only for transfer of Capital Asset and not to the Stock in trade. The 390/0 of the Super B....
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....n law. 8. The Assessee begs to place reliance on the Decision of the Hon'ble Supreme Court in the case of M/s. Malabar Industries vs. CIT (2000) 243 ITR 83 (SC) wherein it has been held that the order should be erroneous and prejudicial to the interest of Revenue. Even though the computation of STCG amounting to Rs. 2,27,462/- arising out of the deemed transfer in the scheme of JOA said to be erroneous but it is not prejudicial to the interest of revenue for the A.Y 2013-14 since the liability gets deferred to the year of sale as per section 45(2) of the Act and therefore the 263 proposal on this ground is uncalled for. 10. Under these facts and circumstances it is submitted that the original Assessment Order was neither erroneous nor prejudicial to the interest of revenue and therefore invoking the provision of section 263 of the Act is uncalled for in the eye of law." 9.The Ld. Pr. CIT has not appreciated the submissions made by the Appellant and ultimately passed an order u/s. 263 of the Act dated 20-03-2018 and set aside the Assessment Order dtd: 31-03-2016 holding that the said Assessment Order was erroneous and prejudicial to the interest of revenue for the reasons st....
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....ng the capital asset at the first stage itself, it is a case of business transaction which is completed when the rights so acquired by the assessee are exercised; none can make profits by dealing with himself, as is the settled legal position in the light of the settled legal position in the case of Sir Kikabhai Premchand Vs CIT [(1953) 24 ITR 506 (SC)]. It is for this reason that we are unable to uphold the action of the authorities below on the facts of this case. No matter how reasonable is it to assume that the assessee will make these profits, these profits cannot be brought to tax at this stage. That is what the legal position, for the detailed reasons set out above, is. 20. In our considered view, therefore, the authorities below indeed erred in bringing to tax the anticipated business profits on assessee's entering into a development agreement with Menorah Realties Pvt Ltd in respect of the land held by the assessee as stock in trade. The impugned addition of Rs Rs. 17,28,81,276 is thus deleted." 15. The Appellant begs to place reliance on the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), wherein ....
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.... 2012-13 and 2 flats were left unsold. The Appellant has filed his objection that the Notional Rent in respect of 2 unsold flats is not applicable for the A.Y 2013-14 since a New Section 23(5) was introduced w.e.f 01-04-2018 and therefore the Ld. PCIT was, not justified to give directions to the AO to bring to tax the notional rent of 2 unsold flats. The objections filed by the Appellant were rejected by the Ld. PCIT on the ground that the New Section 23(5) was clarificatory in nature which is incorrect since the provision applicable w.e.f 01-04-2018. On this count also the order passed u/s. 263 of the Act was not justifiable. 19. Without prejudice to the above submissions the Appellant submits that he has offered the Business Income arising out of the transfer of Stock-in-trade on sale of flats in the A.Y 2016-17' and therefore in the guise of implementation of Order u/s. 263, the same -income cannot be subjected to tax twice for the A.Y 2013-14 and also ~. v 2016-17 which is opposed to the principles of Taxation. In this regard the Appellant begs to place reliance on the decision of the Hon'ble Madhya Pradesh High Court in the case of Smt Daya Bai vs. CIT 154 ITR 248 (MP....
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....-14 the Assessee is following mercantile system of accounting. The question that arises is whether income is to be taxed in the year in which the Assessee received the 39% constructed area in lieu of 61% of land transferred/sold to builder, i.e., A.Y. 2016-17, if this is accepted the same will defeat the system of accounting followed by the Assessee as this will be cash system of accounting i.e., taxing the income in the year in which the sale consideration is received and not in the year the asset is sold on credit. As per provisions of Act, the AO cannot change the system of accounting consistently followed by Assessee. As per the Audit report the Assessee is following mercantile system of accounting. Hence as per accounting standards and as per sale of goods act (which is applicable to Assessee as Assessee has sold stock in trade) the income from sale of goods is to be recognized in the year when the significant 'risk and reward' pertaining to the stock is transferred. 8. The next question that arises in this case is when is the risks and reward in respect of 61 % of stock transferred, was it in A.Y. 2013-14 or was it in A.Y. 2016-17. As per the JDA dated 16.05.2012 pa....
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....h or cancellation the other party can only insist on specific performance and there is no clause to take back the possession of stock, hence the above clearly indicate the risk and reward in 61 % of stock was transferred to the promoter on the date of JDA, i.e., 16.05.2012 and the income as per mercantile system of accounting is to be taxed in A.Y. 2013-14 which is direction issued by the Pr. CIT, Kurnool in the 263 order, hence the Hon'ble ITAT should be requested to uphold the order U/s 263 passed by the Pr. CIT, Kurnool vide order dated 20.03.2018. Long term capital gain 13. It is only reference to this property long-term capital gain calculated by the Assessing Officer on this issue. Since, this property has already converted into stock in trade, it was taken as a business income. However, no business income was calculated for the stock in the case of Anantapura property. Short term capital gain 14. The assessee has purchased converted land on 7.9.2011 and the said land was held as capital asset as on 31.3.2012. Later on, the assessee has converted the same as stock in trade in the books of accounts in the financial year 2012-13. 14.1 On verification of the computation....
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....judicial to the interests of the Revenue, we are of the opinion that the following questions need to be answered. (i) The first objection taken by the assessee is that the assessment order was a protective assessment, therefore, it cannot be revised u/s 263 of the Act. The AO in the assessment order u/s 143(3) of the Act, after determining the taxable income has held that "since the substantive demand is less than the admitted income, the entire payment is kept in abeyance as protective assessment". This observation of the AO is relied upon by the learned Counsel for the assessee to submit that the assessment was a protective assessment. He placed reliance upon various case law to submit that the protective assessment without a corresponding substantive assessment is not sustainable. We are, however, not inclined to accept or adjudicate this contention of the assessee at this stage for the simple reason that the said question is pending adjudication before the CIT(A) and if it is held to be not sustainable, then the order u/s 263 also would not be sustainable as the very basis would have been knocked down. Therefore, it cannot be said that the assessment itself is a protective as....
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.... when the assessee sells her stock-in-trade but not when she contributes her stock-in-trade as her share of capital. Therefore, as rightly pointed out by the CIT(A), no gains have arisen to the assessee during the year by entering into the JDA dated 10-05-2012 with M/s. Ramky Estates & Farms Ltd., much less on accrual basis. Therefore, we see no reason to interfere with the order of the CIT(A) which is in consonance with the legal provisions on the issue. Accordingly, the grounds of the Revenue are dismissed". 12. Further, the Coordinate Bench at Bangalore in the case of Dheeraj Amin vs. ACIT in ITA No.1709/Bang/2013 at Para 19 has held as under: "What the assessee has got today is only a right to sell the 1,28,940.26 fts of constructed area in the Alexandria project and the profits, howsoever certain they may appear to be, will only fructify and be realized, and can even be quantified, only when this right is exercised - in part or in full. That stage has not yet come, and until that stage comes, in our considered view, such profit cannot be taxed. Unlike in a case of a capital gain which arises on parting the capital asset at the first stage itself, it is a case of business tra....
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....Under Sec. 45(1), the capital gains are chargeable to income tax of the previous year in which the transfer took place. The said transfer may be in any one of the modes prescribed under Sec. 2(47). It need not necessarily be by way of sale, exchange or relinquishment of the asset as evidenced by registered documents. It can be in any one of the modes contemplated in clause (i) to (vi) of Sec. 2(47). However, when it comes to levying of capital gains under sub-sec.(2) of Sec. 45, it deals with capital asset converted by the owner thereof into, or is treated by him as stock-in- trade of a business carried on by him as contemplated under Sec. 2(47)(iv). Once such capital asset which is converted as stock-in-trade is sold, it is also subjected to capital gains, but the said capital gains is chargeable to income tax in the previous year in which such stockin- trade is sold. The word used is sold, not transferred. However, if the stock-in-trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire se....
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..... Therefore even if the stock-in-trade which was prior to its conversion a capital asset, as treated by the Tribunal as a capital asset, as possession is not delivered, it would not become a transfer and question of payment of capital gains would not arise. 139. The CBDT Circular No. 495 dt. 22-09-87 which came into effect from 01-04-1988 explains the purpose of sub- clause (vi) of Sec. 2(47) in these following words : pg. 129 "the newly inserted sub-clause (6) of Sec.2(47) has brought into the ambit of transfer, the practice of enjoyment of property rights though words commonly known as power of attorney arrangement. The practice in such cases is adopted normally where transfer of ownership is not legally permitted. A person holding the power of attorney is authorized the power of owner, including that of making construction. The legal ownership in such case continues to be with the transferor. Therefore, with that object and in respect of such persons, clause (vi) was inserted which reads as under : 2(47)(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company of other association of persons or by way of any agreemen....
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.... a manner known to law. 143. Therefore even if Section 2(47) is held to be applicable to a stock-in-trade, unless the transaction in question has the effect of transferring or enabling the enjoyment of any immovable property, it would not amount to a transfer. 144. In the instant case, assessee executed a power of attorney after entering into an agreement of sale for the purposes mentioned therein. It is in pursuance of the power so conferred, coupled with the terms of the agreement of sale, the power of attorney holder has to develop the property, identify the purchasers and sell the undivided share of land as well as the built area to such purchasers. Neither in the agreement of sale nor in the power of attorney, possession of the property was given to him. Having regard to the terms of the power of attorney, the intention of the assessee was not a transfer of the right in a schedule property in favour of his agent nor was he permitted to enjoy the immovable property. Therefore the case would not fall under Sec. 2(47)(vi). The assessee though executed a power of attorney, received the entire consideration under the agreement and acknowledged the same in the books of account an....
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....er Book, relate to the power of the CIT to pass order u/s 263 wherein the AO has not made proper inquiry before completing the assessment. In the cases of P.T. Laskhani Ram, reported in 272 ITR 309, the Hon'ble Allahabad High Court was dealing with the powers of the CIT u/s 263, where the AO failed to make necessary inquiries and it was held that the CIT was well within his jurisdiction in passing order u/s 263 based on record of assessment. Similar view has been expressed in the cases of CIT, Patiala vs. Himachal Pradesh Financial Corpn, reported in (2010) 186 Taxmann 10J (HP), Duggal & Co. vs. CIT, reported in (1996) 220 ITR 456 (Del.), CIT vs. South India Shipping Corpn. Ltd reported in (1998) 233 mITR 546 (Mad.), CIT vs. Deepak Kumar Garg; (2008) 299 ITR 435 (MP), CIT vs. Sanil Goyal, reported in (2009) 176 Taxmann 184 (Uttaranchal); CIT vs. Andhra Civil Constructions Ltd (2003) 216 ITR 461 (Madc); etc. In the case before us, even if it is considered that the AO has not made any enquiries and the CIT is justified in holding the assessment order to be erroneous, we find that the stock-in-trade cannot be considered as transferred in the relevant financial year and therefore, ....