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2023 (1) TMI 1414
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....sessee are reproduced as under:- "GROUND NO. 1: ADDITION OF INCREMENTAL LONG TERM CAPITAL GAINS OF RS. 3630,53,2577- ON CONVERSION OF LAND, BEING CAPITAL ASSET, INTO STOCK-IN-TRADE BY CONSIDERING COST INFLATION INDEX CCIT) OF THE YEAR OF CONVERSION INSTEAD OF CII OF YEAR OF SALE OF FLATS; On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in taxing the incremental long term capital gains on account of conversion of land being capital asset into stock in trade by considering the CII of the year of conversion instead of CII of the year of actual sale of flats by the Appellant. The Appellant prays that the impugned addition of incremental long term capital gains of Rs. 36,30,53,2577- be deleted. ROUND NO. 2 - ADDITION OF RS. 27.97,9357- TO BOOK PROFITS U/S. 115JB IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S. 14A RWR 8D: On the facts and the circumstances of the case and in law, CIT (Appeal) has erred by not holding that addition to book profit under section 115JB of the Act cannot be made with reference to provisions of section 14A of the Act read with R....
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.... engaged in development of real estate. For the year under consideration, the assessee filed its return of income electronically on 29/11/2014 declaring total income at Nil under the normal provisions of the Income-tax Act, 1961 (in short, 'the Act') and book profit of Rs.44,41,08,237/- under section 115JB of the Act. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. In the assessment completed under section 143(3) of the Act, the Assessing Officer made certain additions / disallowances and assessed total income under normal provisions of the Act at Rs.354,42,01,379/- and computed book profit of Rs.40,69,06,175/-. As the income determined under section 115JB was of the Act was less than the income computed under the normal provisions of the Act, the Assessing Officer took the total income at Rs.354,42,01,379/-.On appeal, the Ld.CIT(A) allowed part relief. Aggrieved, both the assessee and the Income-tax Department are in appeals before the ITAT, raising the grounds as reproduced above. 5. The Ground No.1 of the appeal of the assessee relates to computation of long term capital gain on....
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.... financial year in which the capital asset is converted into stock in trade. However the timing of the taxation of the capital gain is differed to the point of sale. Thus whenever the sale of flat occurs during the relevant assessment year the long term capital gain corresponding to the area sold will have to be offered for tax in the very same assessment year. Accordingly the contention of the assessee that the long term capital gain are to be taxed based on percentage of completion method cannot be accepted and the differential long term capital gain as worked out below is required to be brought to tax. FMV@ 1981(cost) Index Indexed Conversion LTCG %com pletion Capital gain already offered FY Descrip Area sold @Rs.92/sq.ft. factor cost Price 2013- 14 One ICC 169,178 15,64,376 939 146,149,491 2,188,772,167 2,042,622.677 43.26% 883638569.9 (As per ROI Two ICC 198.799 18,289,508 939 171,738,480 2,610,218,660 2,438,480.180 ....
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....ed under the head Income from Business and Profession' but for the purpose of Long Term'Capital Gain it will not work. It is important for Long Term Capital Gain that how many flats were sold and not how much construction is GBPted. The Capital Gain will be worked out on the basis of unit wisesale of the flats. Accordingly, both the claim of the assessee, i.e., Long Term Capital Gain as per the working under percentage completion method and indexation till the year of sale are hereby rejected. So as per the provisions of the Income Tax Act, 1961 the Long Term Capital Gain works out at Rs. 530,70,38,903/~ after removing the wrong claim of indexation and rejecting percentage completion method for the working of LTCG. Since the assessee has already offered Rs. 206,09,36,801/-under the head LTCG, the amount of Rs.3,246,102,102/-, being differential amount in the capital gain offered, is added to the income ofthe assessee. Penalty proceedings u/s 271(l)(c) of the Act is initiated separately." 5.2 On appeal, the Ld.CIT(A) on the first issue of taxing entire capital gain on account of conversion of capital asset being land into stock in trade in the year in which it was converted i....
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....n which asset was converted into stock-in- trade. On the other hand, Sec 45(2) very clearly defines that profit or gain arising from the transfer is to be taxed in the year in which asset is converted into stock-in-trade. For proper appreciation of facts, Sec 45(2) is reproduced as under:- "Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capita! asset into, or its treatment by him as stock-in-trade of abusiness carried on by him shall be chargeable to income-tax. as his income of the previous year inwhich such stock-in-trade is sold otherwise transferred by him and, for the purposes of Sec 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the fullvalue of the consideration received or accruing as a result of the transfer of the capital asset]". 8.7 From perusal of the Section, it is evident that transfer taken place in the year in which asset is converted into stock-in-trade and law is very clear about indexation cost is to be applied for the year in which transfer has taken place. In view of the above discussion, the ....
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....therwise transferred by him. Since the sale of Stock in Trade would actually happen when the flats are completed and ownership transferred, a strict interpretation of section 45(2) would suggest that the capital gains rising on conversion of stock in trade would be chargeable to tax when; -(project is completed. However, it would be inconsistent to say that the business profits arising from real estate activity would be chargeable to tax on percentage completion method each year during the construction activity and thecapital gains portion of there is chargeable to tax in a different year i.e. when the project is completed. A reading down of. section 45(2) of the Act would therefore mean that the capital gains on conversionshould be charged to tax in the same year in which thecorresponding business income is offered to tax, on the same basis i.e. percentage completion method which the company is following. Further, the assessee has made disclosure by way of a note at serial no. 31 in Notes to Financial Statement in relation to the Revaluation Reserve andamount released from the revaluation reserve on credited to profit and loss account and which is read as under: "31. The ....
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....88 which was not considered by the appellate authorities in the proper perspective and consequently recorded a perverse finding ? 10. In respect of above question of law raised, after considering the submission of the parties, the Hon'ble High Court held as under:- "9. The material on record discloses that the appellant a partnership firm, which owned immovable properly, converted the same into stock-in-trade in the year 1987-88. They entered into an agreement dt. 16th March, 1988 with M/s Unitech Ltd. under which the said company was expected to develop the property, construct flats and give to the assessee their share in the constructed buildmg. The assessee is assessed to income-tax regularly. In the year 1988-89 when this agreement was entered into, the Revenue did not treat it as a transfer and called upon the assessee to pay tax. However, the claim for capital gains is made only when the assessee executed registered sale deeds in favour of the purchaser of the flats in the financial year 1992-93. At that stage, for the purpose of calculating capital gains instead of taking the cost inflation index, they took the index as prevailing in 1988, the date on which the i....
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....ition. Therefore, when the impugned order passed by the appellate authorities is in accordance with the aforesaid statutory provisions, the said substantial questions of law have to be answered in favour of the assessee and against the Revenue." 11. We find that Hon'ble High Court has directed to adopt both, firstly, the market value of the capital asset as on the date of the transfer of stock-in-trade and secondly, for indexed cost of acquisition also on the date of sale or transfer of the stock in trade. But before us, the assessee is seeking only application of part of the ratio of the decision for indexation of the cost of acquisition only and not for the purpose of sale consideration of the capital asset. In our opinion, the assessee cannot choose part of the decision which is in its favour ignoring the other part of the decision of the Hon'ble High Court. Though the provisions of section 45(2) prescribe for taking fair market value of the asset as on the date of such conversion for the purpose of full value of the consideration received or acquiring as a result of transfer of the capital asset and also cost of acquisition to be indexed till the date of such conversion, how....
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....ative could not controvert the above proposition. Accordingly, we are of the view that this issue is covered by the special benfch decision of this Tribunal in the case of Vireet Investments (P.) Ltd. (supra), respectfully following the same, we delete the disallowance and allow this issue of assessee's appeal." 14. Respectfully following the finding of the Tribunal, we restore this issue to the file of the Assessing Officer with the direction to follow the finding of the Tribunal in earlier and in accorence of law. The ground No.2 of the appeal of the assessee is accordingly allowed for statistical purpose. 15. The Ground No.3 of the appeal of the assessee relates to short credit of TDS amounting to Rs.1,44,21,975/- allowed to the assessee. This ground was also raised by the assessee before the Ld.CIT(A) by way of an additional ground and sought that TDS credit of Rs.1`,44,21,975/- be allowed on the basis of form 26AS. However, this ground has also not been adjudicated by the Ld.CIT(A). As this claim of TDS is a matter of verification, therefore, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding in accordance to law . The grou....
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.... subsidy Is received for development of industries in backward areas, it constitutes 'capital' receipt regardless of the fact that it has been received only after the commencement of production, as it is the 'purpose' of the scheme which is of fundamental importance in determining the nature of the subsidy as 'revenue1 or 'capital1. This decision'of the Special Bench has been upheld by Hon'ble Bombay High Court in CIT v. Reliance Industries Limited [2011] 339 ITR 632 (Bom.). 29. Further, the Hon'ble Supreme Court has held in Ponni Sugars and Chemicals Ltd. (supra), after considering the decision in Sahney Steel (supra) held that the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the 'purpose' for which the subsidy is granted and that if the purpose of a subsidy is to enable the assessee to run the business more profitably then the receipt is on 'revenue' account but if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit (or to expand the existing unit then the receipt would be on 'capital' accou....
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.... industrial development in the State, the subsidy / incentives received is on capital account in the present case of the assessee and hence, not chargeable to tax. Accordingly, this issue of the assessee's appeal is allowed. " 18. Respectfully following the earlier order of the Tribunal (supra), the finding of the Ld. CIT(A) on the issue in dispute in deleting addition on account of subsidy under Package Scheme of Incentives (PSI), 2007 is upheld. Ground No.1 of the appeal of the Re venue is accordingly dismissed. 19. Ground No.2 of the Revenue's appeal relates to addition of Rs.27,97,935/- under section 14A read with rule 8D in respect of the expenditure incurred in relation to exempt income. 20. Brief facts qua the issue in dispute are that during the year under consideration, assessee has not earned any exempt income; however, the Assessing Officer, applying Rule 8D of the Income-tax Rules, 1962 read with section 14A of the Act made disallowance of Rs.27,97,935/-. The Ld. CITA) following the finding of the Tribunal for A.Y. 2012-13 wherein decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs CIT in ITA No.749 of 2014 has been followed, deleted the a....
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....s 'Interest subsidy1 and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961." 25. Respectfully following the finding of the Hon'ble Calcutta High Court, the finding of the Ld.CIT(A) on the issue in dispute is upheld. The ground of appeal of the Revenue is accordingly dismissed. 26. Now we take up the cross appeal for A.Y. 2015-16. The ground raised by the assessee are reproduced....
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.... for in section 115JB of the Act and is therefore in contravention to the law laid down by Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT(255 ITR 273)?" 27. In ground 1 assessee has raised the issue of short credit of TDS. The identical ground for A.Y. 2014-15 has been restored back to the file of the Ld.AO for allowing credit as per the provisions of the Act. Accordingly, this ground in the year under consideration is also restored to the file of the A.O. 28. As far as grounds 1, 2, 3 & 5 of the appeal of the Revenue are concerned, same are covered by our decision in the case of the assessee for A.Y. 2014-15 and therefore, same are decided mutatis mutandis. 29. In ground 4 of the appeal, the Revenue has challenged the deletion of addition of Rs.112,67,62,506/- towards revaluation reserve on account of conversion of the amount being 'fixed asst' into stock in trade. The Ld. CIT(A) following the finding of the Tribunal in A.Y. 2012-13 has deleted the addition observing as under:- "10, Ground Mo, 5 : Vide this ground, Appellant has agitated against addition to Book Profit u/s 115JB towards alleged creation of revaluation reserve by debiting P & L ....
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.... and (ii) its conversion into stock-in-trade, assessee has passed one consolidated accounting entry as under: - For ICC Project 1: Account Code Grouped as Entry Debit Credit 13270 Current Assets, Loans and Advances Stock-in trade A/c 377,85,47,250 11105 Fixed Assets To Land A/c. 4,03,630 11521, 11525, 11510 Capital work in Progress (und Fixed Assets) To capitalized Costs A/c. 1,88,04,439 22210 Reserves & Surplus To Revaluation Reserve 375,95,30,182 For ICC Project 2: Account Code Grouped as Entry Debit Credit 13270 Current Assets, Loans and Advances Stock-in trade A/c 390,32,79,000 11105 Fixed Assets To Land A/c. 4,16,954 11521, 11525, 11510 Capital work in Progress (und Fixed Assets) To capitalized Costs A/c. 1,94,25,403 22210 Reserves & Surplus To Revaluation Reserve 388,34,36,643 It is evident from the Account Codes and the relevant Groupings mentioned in the above entries that the credit to the Revaluation Reserve account has been created ....
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....unt... Cr. 81,69,56,453 (b) For 1CC-2 Project: Revaluation Reserve........... Dr. 83,57,27,418 To Profit and Loss Account.. .Cr. 83,57127,418 This is given by the assessee in its paper book at page 82 note no. 31 to 32, the audited accounts explaining this Position. 43. Having recognized the revenues as above, the assessee claimed that it is now left with Closing stockin-trade and its valuation. As the revalued amount of land is included in the cost of the project, to the extent of the revenues from the project are not yet recognize the revalued amount is carried forward as part of work-in-progress by crediting theP&L account and carrying forward the dosing WIP to the Balance Sheet. This is reflected in the following accounting treatment: (a) For ICC-i Project: Stock-in-trade (Balance Sheet).. .Dr. 582,43,61,125 To Profit and Loss A/c..,.....,.....Cr, 582,43,61,125 (b) For ICC-2 Project: Stock-in-trade (Balance Sheet).. .Dr. 605,67,27,668 To Profit and Loss A/c............. Cr. 605067,27,668 From the above, we find that Revaluation Reserve was created on transfer of land from....
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....tion from one number place to the adjacent one of higher place value'. In. the Oxford English Reference Dictionary: (in reckoning) transfer (a figure) to a column of a higher value' It is apparent from the plain reading of the phrase 'amounts carried to' in clause (b) of Explanation 1 read with the above referred shades of meanings of the word 'carry' that the amounts contemplated to bein creased in computing the book profits are the amounts that are transferred from the Profit and Loss Account to the Reserves Account. As claimed by id Counsel Sh. Thar in the present case, there is no transfer of amounts from the Profit and Loss Account to the Reserves Account Indeed, the reserves in the present case are created by way of revaluation of land which means that the reserves do not reflect the above, it is evident that the AO has misread the provisions of the law and misdirected himself in making the addition to the book profits in this behalf. 45. We have gone through the case law relied on by the Counsel for assessee of the Hon'ble Supreme Court in the case of National Hydroelectric Power Corporation v 'CIT (320 ITR ....
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.... etc." It is evident on the given facts that the revaluation reserve is not created by 'Application of profits'. Indeed, the debit to the Profit and Loss Account indicates the cost of land to the real estate division and not 'Application of profits". 46. Therefore, we are of the view that in the light of the decision of Supreme Court in National Hydroelectric Power Corporation Ltd. (supra),the addition made by invoking the provisions of clause (b) of the Explanation-1 to section 115JB(2) cannot be sustained. 47. The assessee claimed that disclosure under section 217 of the Companies Act 1956 is made and as per Clause (b) of section 217(1) of the Companies Act, 1956, requires disclosure in the report by the Board of directors in respect of the amounts which the company proposes to carry to any reserves. The text of said section is set to out as annexure-5.The disclosures pursuant to section 217 are given in the Directors' Report starting from page 32 of the audited accounts. It is apparent from para I of the Directors Report that various appropriations out of profits are disclosed and one such appropriation is that of profits "transferred t....
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....t for a given year should be increased by - 'the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset 'The said clause was introduced by Finance Act, 2012. The Memorandum explaining the provisions of Finance Bill, 201.2 has explained the rationale in the following words. "It is noted that in certain cases, the amount landing in the revaluation reserve is taken directly to the general reserve on disposal of revalued asset. Thus, the gain attributable to revaluation of the asset is not subject to MAT liability. It is, therefore, proposed to amend section II5JB to provide that the book profit of the purpose of section 115JB shall be increased in the amount standing in the revaluation reserve relating to the revalued asset which has been retired or disposed, the same is not credited to the profit and Loss account" Relevant Extracts from the Explanatory memorandum to the Finance Bill, 2012are set out at Annexure 7." Para II of the relevant portion of Explanatory Memorandum clearly indicates that the amount standing to the Revaluation Reserve should be treated as part of taxable Book Profits only ....