TaxTMI 
TaxTMI 
2018 (2) TMI 2028
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.... 4. The ld. CIT(A) has erred on facts and in law in confirming the action of the AO in not allowing the indexation benefit on the development and other expenses of Rs. 16,17,418/-." 2. During the course of hearing, ld. AR submitted that the assessee derives income from interest, rent and share trading. He filed the return declaring income of Rs. 58,68,080/- which included long term capital gain of Rs. 32,73,855/- after claiming deduction u/s 54 of Rs. 20 lakhs. 2.1 In course of assessment proceedings, assessee explained that he was having a land at Khasra Nos. 9, 12, 26 and 27 at Village Livari, Ajmer which was purchased by him for Rs. 4,40,000/- from Shri Madan Mohan Batwara on 17.10.1996. On this land, there was an agricultural connection and the land was used for agricultural purpose as is evident from Khasra Girdavari. The assessee has shown the said agricultural land in his personal Balance Sheet under the head "fixed assets" and agricultural income was also declared in the return of income for AYs 2003-04 to 2005-06. 2.2 In the meanwhile, the assessee applied for conversion of this agricultural land for use of resort to Urban Improvement Trust, Alwar and accordingly....
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.... of 3 plots during that year as adventure in the nature of trade and assessed the income there from as business income as against income from capital gain declared by the assessee. However, the Ld. CIT(A) after considering the entirety of the case vide order dated 24.11.2014 held that the profit earned on sale of plot has to be assessed as income from capital gain. Thus once this issue is decided by the predecessor Ld. CIT(A) in favour of the assessee, without any distinguishable facts, the Ld. CIT(A) was not justified in holding that the income from sale of plots during the year is to be assessed as business income. It is a settled principle of law that the appellate authorities should respect the orders of other authorities in same hierarchy. In this connection reference is made to the decision of Hon'ble Supreme Court in case of Radhasaomi Satsang vs. CIT 193 ITR 321. Again the Hon'ble Supreme Court in case of Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR 32 / (1977) 106 ITR 1 held as under: "At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactiv....
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....s much as the assessee never purchased the agricultural land as a trader. He acquired the land with intention to hold it and have agricultural income by cultivation. The agricultural land was declared in the return upto AY 2005-06 which is accepted by the department. The assessee has not carried out any dealing in the real estate in earlier years. He only converted the land use from agricultural to resort and then to residential for better utilisation and thereafter for exploitation of his capital asset. Infact, the factors mentioned by the Hon'ble Supreme Court, are supportive to the facts of the case of the assessee. 2.10 In various cases, it has been held that purchase of land once upon a time and thereafter selling the same in piecemeal after development, the profit arising would be taxed under the head Capital Gain and cannot be treated as adventure in the nature of trade. Some of these decisions are as under: • Commissioner of Income-tax vs. Sohan Khan & Mohan Khan [2008] 304 ITR 194 (RAJ) • Saroj Kumar Mazumdar vs. Commissioner of Income Tax (37 ITR 242) (SC) • Janki Ram Bahadur Ram vs. Commissioner of Income Tax (57 ITR 21) (SC) ....
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....ellant has started selling the plots. Some of the plots were sold last year and 5 of such plots were sold during the year under consideration and declared the income as long term capital gain. 7. That during the year under consideration, the appellant had sold 5 plots and got total receipts of Rs. 97,16,600/-. 8. That the AO had considered the income arisen out of the above mentioned sale as business income by treating it as 'adventure in the nature of trade'. 5.3.2 Now, the moot question in the present grounds of appeal is whether the sale of plots comes under the purview of 'adventure in the nature of trade or not'. In this regard, the appellant had cited a large number of judicial pronouncements in favour of its claim. I have gone into the plethora of judgments cited by the appellant. However the gist of most the cited judgments hinge broadly on the parameters set by the Hon'ble Supreme Court in the case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 (SC). Therefore it is pertinent to go into the rationale and the parameters set by the Apex court in the said judgment." Therefore, the above mentioned judgment has laid down certain tests to ....
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....ize the value of the asset and using it for business purposes. In that pursuit the appellant had constantly tried and executed different methods at different time exploiting the resources and maximize the profit out of it. It is a continuous process right from the purchase of land in the year 1996 and till date. In this regard, I have also noted the above mentioned Apex court judgment where it has said that just as the conduct of the purchaser subsequent to the purchase of a commodity improving or converting it so as to make it more readily resalable is a relevant factor in determining the character of the transaction, so would is conduct prior to purchase be relevant if it shows a design and purpose. I have clearly noted a purpose and design in the utilization of the land and it all pointed towards a business sense and eventually a business transaction. The appellant has cited Hon'ble Rajasthan High Court judgment in the case of Sohan Khan and Mohan Khan as reported in 304 ITR 194 (Raj.), in favour of his claim. I have perused the judgment. However, the concluding para of the judgment has itself said that: ".......it is the different story....
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....out any dealing in the real estate in earlier years. He only converted the land use from agricultural to resort and then to residential for better utilisation and thereafter for exploitation of his capital asset. Further, reliance was placed on various decisions where it was held that purchase of land once upon a time and thereafter selling the same in piecemeal after development, the profit arising would be taxed under the head "Capital gain" and cannot be treated as arising out of adventure in the nature of trade and brought to tax under the head "profits and gains of business". We have gone through these contentions and decisions which have been cited by the ld AR at the Bar and we are of the view that these decisions, rendered in the context of individual facts and circumstances of the case, have either decided a particular transaction as a disposal of capital asset rendering it to be brought to tax under the head "capital gains" or as adventure in the nature of trade rendering it to be brought to tax as a disposal of stockin- trade under the head "profits and gains from business". 6. At the same time, there are situations where a capital asset, subsequent to initial acquisi....
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....uch profit arising from the transfer by way of conversion as stock-intrade shall be chargeable to income-tax as income of the previous year in which such stock-in-trade is sold or otherwise transferred. Section 45(2) starts with a non obstante clause. Therefore, the provision of section 45(2) supersedes all the other provisions. Under sub-section (2) of section 45, it is clear that capital gain shall be charged in the previous year in which such stock-in-trade, which is known to be so only after conversion, is sold or otherwise transferred. Admittedly, the transfer of stock-in-trade in the present case was effected by way of registered deed of conveyance during the present assessment year. Therefore, the first appellate authority was justified in holding that capital gain was to be computed in the previous year even though that conversion was effected before 1-4-1985. This sub-section supersedes provision of sub-section (1) and provides for charging of capital gain in the year when the converted stock-in-trade is sold or otherwise transferred. For the purpose of section 48 also this section has provided the method for computing capital gain in such circumstances, i.e., the....
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....trade of a business carried on by him. The words 'business carried on by the assessee' does not mean that before conversion of investment or capital asset in stock in trade the business must be in existence. If the assessee starts the business by converting the investment into stock in trade instead of purchasing it from the market can it not be called that the assessee is in the business of trading in shares enabling the assessee to avail the benefit of section 45(2) of the Act. To our mind the restrictive meaning as suggested by the revenue should not be given to the words 'business carried on by him' in the light of the use of the words in other sections of the Act like section 28(i). Moreover, in the instant case, the assessee was already in the business of manufacture and sale of furniture and section 45(2) does not state that the investment can only be converted in a stock in trade of the business of trading in shares. The assessee can undertake multiple business activities under his proprietary concern. Besides, the manufacturing and sale of furniture, the assessee can also deal in trading in shares in the name of same proprietary concern keeping the stock in....
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....siness carried on by him is for and from the assessment year 1985-86 be charged to tax under the head capital gains in the previous year in which such stock-in-trade is sold or otherwise transferred by him. The property shall be deemed to have been transferred in the year in which it was converted into stock-in-trade. The provision of Section 45 (2) providing for capital gains takes care of the facts, where the assessee does not transfer capital assets into stock-in-trade, but the asset is treated as stock-in-trade. Section 45(2) provides as follows:- "45(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from 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 stock-in-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." ....
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.... whenever a land, which originally was treated as investment and later converted into a stock in trade, is sold or transferred. So the land in this case was converted into a stock in trade in the hands of EML and as demerger is not a transfer, the capital gains under that section is charged when the land was sold by the assessee company. The capital gains accruing on conversion of the land in stock in trade can be determined in the hands of EML and the computation cannot be questioned by the department. Levy of tax is postponed at the time of actual transfer or sale. Under Section 45(2) of the Act, the section charges to capital gains conversion of investment, into stock in trade but postpones the charge of tax to the time, such stock in trade is sold or transferred. Once converted into stock in trade, the asset will continue to be treated as stock in trade, as mentioned in the section itself. Application of provisions of Section 45(2) will not reconvert the converted stock in trade back into an investment. Consideration of sale of such converted asset will always be assessed as profits of business. The said provision was interpreted by the Assessing Officer under the said section.....
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....(1973) 89 ITR 258 (SC) : TC17R.1227, it would be the market value of these raw materials and semi-finished needles as on 30th Sept., 1961. It is now well settled by these decisions that where an assessee converts his capital assets into stock- in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade (since this would be the cost to the business) and not the original cost to the assessee ........" 24. Therefore, in the light of the decisions rendered by this court as well as the Hon'ble Supreme Court and the orders passed by the coordinate bench of the Income Tax Appellate Tribunal, in the case of Essorpe Mills Ltd. (supra) wherein the revenue has accepted the sale of 50% of the same property by the Essorpe Holdings Pvt. Ltd., to an extent of 5.075 acres of land for the assessment year 2009-10, directing the Assessing Officer to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value o....