TMI Blog2011 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... rty on the date of such conversion as full value of the consideration received or accruing as a result of transfer of the capital asset. Payment for change of user of land from Industrial to Commercial - Business Expenditure or Cost of Cost of Improvement - Since the expenditure was incurred prior to to date of conversion of land into stock in trade therefore it shall be allowed as Cost of Improvement. Set off of unabsorbed depreciation against the income of the current year - Held - Since the business of the assessee as carried on in the earlier years had been discontinued and the same was not carried on in the current year, the claim of the assessee for set off of unabsorbed depreciation pertaining to earlier years cannot be allowed. Interest payment by Assessee Co. to its Holding Co.- Held that:- the activity of closing down of earlier business had taken place in the earlier year and not in the year under consideration and its claim for deduction on account of interest paid to holding company, therefore, cannot be allowed in the year under consideration. - Decided against the assessee. Loan taken from Holding Company and advancing it to group concerns - Assessee cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-2009. In ground No.1 of this appeal, the assessee has challenged the action of the learned CIT(Appeals) in confirming the computation of 'long term capital gains' as made by the A.O. at Rs.61,03,28,546/- in respect of transfer of land. 3. The assessee in the present case is a company which was earlier engaged in the business of manufacturing of containers. The said business was discontinued sometime in the year 1999 and all the staff and workers employed therein were removed. Thereafter, the assessee company engaged itself in disposing off the plant and machinery as well as containers manufactured in the earlier year and lying in stock. It claimed to have converted the factory land having original cost of acquisition of Rs.9,11,881 into stock in trade in the previous year relevant to A.Y. 2005-06. The fair market value of the said land as on 1.4.1981 was adopted by the assessee at Rs.9,40,83,190 on the basis of valuation report. While justifying its claim for the said conversion in terms of provision of section 45(2), the assessee company submitted before the A.O. that it had passed a special resolution in the extraordinary general body meeting of the shareholders held on 12.9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suburban District for granting permission to change the use of the land. On perusal of the development agreement dt.24.6.2005 as well as supplementary development agreement dt.7.7.2005, the A.O. noted that the property of the assessee was to be developed by M/s. GNRC on its own cost and risk. He also noted that the assessee company was entitled to receive only the consideration as per the agreement and there was no interest of the assessee company in the project except getting the stipulated consideration in the form of constructed flats. He also noted that the assessee vide an agreement dt.4.8.2005 had sold the said constructed flats for a guaranteed consideration of Rs.83.50 Crores to M/s. R.T. Exports Pvt. Ltd. 5. After having taken into consideration all the facts of the case as noted above, the A.O. held that the factory land belonging to the assessee which was held as a capital asset could not have been converted into stock in trade prior to the permission of the government in respect of change of user of the said land. He held that prior to the said permission, the land continued to remain a capital asset irrespective of the fact that a resolution was passed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of conversion of its asset into stock in trade. It was contended that the conversion of land by the assessee company into stock in trade was valid and the provisions of section 45(2) were clearly applicable. It was urged by the assessee that the A.O. may therefore be directed to recompute the long term capital gains in accordance with the provisions of section 45(2). 7. The learned CIT(A) did not find merit in the submissions made on behalf of the assessee and proceeded to uphold the action of the A.O. in computing the long term capital gains chargeable to tax in the hands of the assessee after dealing with various contentions raised by the assessee elaborately in his impugned order as under : "2.4 I have gone through the assessment order, perused the submissions made by the appellant and also discussed. the case with the A/R of the appellant. The A.O. in the assessment order has discussed in detail as to how the land owned by the appellant was not converted into stock in trade and was only a capital asset in the hands of the appellant and as to how the provisions u/s. 45(2) are not applicable to the appellant's case. Before me the submissions made before the A.O. been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock in trade. Thus, the facts of the two cases being different, the ratio of the judgment of Hon'ble ITAT as above is not applicable, to the facts of the appellant case. (iv) The appellant has also taken plea that conversion took place in year ending 31 .03.2005 relevant to A.Y. 2005-2006 where the same has been accepted by the A.O. The contention of the appellant is not correct since as held by A.O. no such conversion has taken place. Also, no such finding is given by A.O. in assessment order for A.Y. 2005-2006. Further the principle of res judicata is not applicable to the income tax proceedings. (v) The appellant further stated that the decision taken by the appellant company to convert land into stock' in trade 'as per resolution dated 29.05.1994, the conversion took place and it was the prerogative of the appellant to decide the particular asset as fixed asset or stock in trade for which no permission was required under any law. It was also stated that permission granted by Collector brought better price to the appellant and was never hurdle for such sale. However, I do not agree with the contention of the appellant since had this been the case, the land could have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of development is exclusively that of the developer and not that of the appc1lan. Accordingly, I am of the considered opinion that A.O. was justified in holding that a transfer of development right of the factory land by the appellant to the developer is transfer of capital asset under the provision of section 2(47) and the income on such transfer is chargeable to as capital gains u/s. 45 of the IT. Act. " 8. The learned counsel for the assessee at the outset invited our attention to page No. 20 and 21 of his paper book to show that the commencement of real estate business'as new business was approved by the shareholders of the assessee company in the extraordinary general meeting held on 12th Sept.,1994. He then invited our attention to the letter dated 04-03-1997 received by the assessee company from Brihanmumbai Mahanagar Palika informing the assessee that its request to grant permission for the development of industrial zone land for commercial user could be considered subject to compliance of certain terms and conditions. He also invited our attention to a copy of similar letter received from the office of Additional Collector placed at page No. 64 on 21-12-1998 regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order issued by the Collector on 16th May, 2005 and there was no justification in the action of the authorities below in not recognising the said conversion for want of the said order. He contended that even if it is assumed for the sake of argument that the conversion of land into stock in trade was not possible prior to 16th May, 2005 when the order was issued by the Collector as held by the authorities below, the said date can be taken as the date of conversion and the assessee has no objection for the same. He submitted that the land converted into stock in trade was subsequently sold by the assessee in the previous year relevant to assessment year 2006-07 and the long term capital gain arising from conversion of land into stock in trade is payable only in that year as per the provisions of section 45(2). He contended that all the efforts made by the assessee to change the user of land from industrial to commercial and then commercial to residential itself constituted a business activity and even in its books of account, the land was treated as stock in trade by the assessee company after its conversion. He contended that there was thus sufficient evidence to show that the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0] 133 TTJ 595 (Chennai). 12. The learned DR submitted that the important question that arises in the present case is whether there was conversion of land held by the assessee into stock in trade within the meaning of section 45(2) and if so, when such conversion had taken place. She invited our attention to the copy of order issued by the Collector placed at page No. 99 of assessee's paper book and pointed out that the assessee company had only the occupancy or lease rights in the land and it did not have any ownership right therein. She contended that it was possible for the assessee to convert such occupancy or lease rights in the land into stock in trade. She submitted that as per the provisions of section 45(2), the conversion into stock in trade must be for the business carried on by the assessee. She contended that there was, however, no business of real estate development carried on by the assessee so as to say that the conversion of land into stock in trade was for the purpose of the said business. She submitted that all the steps taken by the assessee company were for the limited purpose of realization of its capital asset value i.e. rights in the land. She submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. It is observed that the claim of the assessee of having converted its land into stock in trade as per the provisions of section 45(2) has not been accepted by the authorities below and the issue raised before us in this context is whether there was such conversion within the meaning of section 45(2) as claimed by the assessee. The provisions of section 45(2) deal with the manner and method of computing 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. As provided in section 45(2), such profits or gains, notwithstanding anything contained in section 45(1), shall be chargeable to income-tax as the income of the assessee 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. In the present case, the claim of the assessee for conversion of land into stock in trade within the meaning of section 45(2) has not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and. 29th May, 2004: Resolution passed in the meeting of Board of Directors of the assessee company converting the land owned by it into stock in trade. 30th July, 2004: No objection certificate issued by the Labour Commissioner to MCGD communicating its no objection to grant permission for development of land as sought by the assessee. 16th May, 2005: Order issued by Collector, Mumbai Sub Urban District granting permission to the assessee for change of user from original industrial to that of residential and the proposal of the assessee for development of its property was finally approved subject to certain terms and conditions including the payment of 50% of unearned income. 16. The different steps taken by the assessee in the matter of development of its land as enumerated above clearly show that the business of real estate development had not only been just commenced by the assessee by taking the first step of passing the special resolution in the shareholders meeting authorizing it to commence the said business, but even the same was carried on by it by taking further steps to make the said land fit for redevelopment which involved obtaining the permissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary requirements and only after taking all these steps, the property was converted into stock in trade. The first phase of real estate development thus was completed by the assessee which had started from the special resolution passed by the shareholders authorizing the company to carry on the real estate development and ended with conversion of the land into stock in trade after making it fit for redevelopment. Taking into consideration all the steps taken by the assessee company in this phase spanning over the period of 6 to 8 years which very much formed part of the activity of real estate development, we are of the view that the real estate business was duly commenced and carried on by the assessee. 18. The Revenue authorities have laid great emphasis on the fact that as per the development agreement, the assessee company had entrusted the development work to a third party for fixed consideration in the form of constructed area in the proposed building. According to them, the assessee has not taken any risk which a person carrying on the real estate development business would normally take. They, however, have ignored a vital fact that the major risk involved in the real esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and conversion thereof into stock in trade was possible and permissible. The rights being capital assets which could be commercially exploited in the business of real estate development, in our opinion, could be converted into stock in trade by the assessee as owner thereof notwithstanding the fact that the permissions required for further development or redevelopment thereof were awaited at that stage. It is quite usual in the real estate development business that a developer purchases even an agricultural land for developing the residential projects thereon and the same is treated as stock in trade subject to obtaining of the required permissions. 20. The issue as to whether the assessee has carried on a particular activity as a business activity or not depends upon the intention of the assessee and such intention can be gathered from the conduct of the assessee. In the present case, the conduct of the assessee in passing a special resolution in the meeting of shareholders authorizing commencement of new business of real estate development, the subsequent steps taken to make its property fit for development/redevelopment, the agreement entered into with the third party for fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersion into stock in trade would become taxable as business profits in the relevant assessment year. In our opinion, the decision of the coordinate bench of the Tribunal in the case of Tej Pratap Singh (supra) cited by the learned counsel for the assessee is squarely applicable to the issue involved in the present case. As such, considering all the facts of the case, we are of the view that the business of real estate development was duly carried on by the assessee and the conversion of its property by the assessee into stock in trade of the said business as per the resolution passed by the Board of Directors on 29th May, 2004 was as per the provisions of section 45(2). The profit or gains arising from the transfer by way of such conversion thus was chargeable to tax as the income of the assessee under the head "Capital Gains" of the year under consideration since the said stock in trade was admittedly sold by him in that year. We, therefore, direct the AO to recompute the capital gain by adopting the fair market value of the said property on the date of such conversion as full value of the consideration received or accruing as a result of transfer of the capital asset. Ground No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this issue before the authorities below. He contended that if the amount of Rs.23 crores recovered from the developer is to be treated as part of consideration, the same is to be allowed as deduction while computing the long term capital gain being cost of improvement or expenses incurred in connection with transfer of land. In support of this contention, he has relied on the decisions of Hon'ble Bombay High Court in the case of CIT v. Abrar Alvi [2001] 247 ITR 312 and in the case of CIT v. Smt. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.) as also that of Hon'ble Gujarat High Court in the case of Mathurdas Mangaldas Parekh v. CIT [1980] 126 ITR 669. 24. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case on this issue and submitted that the same are well reasoned and well discussed. 25. We have considered the rival submissions and also perused the relevant material on record. It is observed that the sum of Rs.23 crores was paid by the assessee to Collector for change in the user of land from industrial to commercial and the same, therefore, in our opinion, constituted cost of improvement of the land sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n pertaining to the earlier years. On appeal, the learned CIT(Appeals) upheld the action of the AO on this issue. 28. At the time of hearing before us, the learned counsel for the assessee has fairly and frankly agreed that this issue is squarely covered against the assessee and in favour of the Revenue by the decision of Mumbai Special Bench of ITAT in the case of Dy. CIT v. Times Guaranty Ltd. [2010] 40 SOT 14 (Mum.) (SB) wherein it was held that provision contained in section 32(2) as substituted by the Finance Act, 2001 is substantive and the same is applicable prospectively with effect from assessment year 2002-03 onwards. It was held that brought forward unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2) and the assessee cannot claim set off of the same against income of the subsequent years i.e. assessment year 2002-03 onwards. Respectfully following the said decision of the Special Bench of ITAT, we uphold the impugned order of the learned CIT(Appeals) confirming the disallowance made by the AO on account of assessee's claim for set off of unabsorbed depreciation pertaining to the earlier years and dismiss ground No. 3 of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of such closing down of business is allowable as a business expenditure. 32. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case on this issue. He contended that the business activity for which the amount was borrowed by the assessee company from its holding company had been closed by the assessee in the earlier years and there being no activity of the said business carried on in the year under consideration, interest paid on the loan borrowed from holding company was not an allowable business expenditure as rightly held by the authorities below. 33. We have considered the rival submissions and also perused the relevant material on record. It is observed that the loan from its holding company was borrowed by the assessee in the year 1995 for its business of manufacturing which was being carried on then. The said business, however, was discontinued in the year 1998-99 and there was no activity relating to the said business carried on by the assessee in the year under consideration. The loan borrowed by the assessee company from its holding company thus was not utilized by the assessee for the business carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity and the income earned from the said activity in the form of interest was not the business income of the assessee. He held that the same was chargeable to tax in the hands of the assessee under the head "Income from other sources". On appeal, the learned CIT(Appeals) upheld the action of the AO on this issue observing that taking of loan from its 100% holding company and advancing the loan amount to four other group companies could not be treated as business activity of the assessee company by any stretch of imagination. 36. We have heard the arguments of both the sides and also perused the relevant material on record. The learned counsel for the assessee has not been able to explain as to how the taking of loan by the assessee company from its holding company and advancing the same to four other group companies in the form of ICDs can constitute business activity of the assessee in the facts and circumstances of the case. There is nothing brought on record to show that the assessee company was in the business of finance or money lending in the year under consideration. We are, therefore, of the view that the net interest income earned by the assessee from investing the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. 40. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case on this issue. 41. We have considered the rival submissions and also perused the relevant material on record. We have already held while deciding the main issue raised in ground No.1 of this appeal that profit arising from transfer of land by way of conversion into sock in trade is chargeable to tax in the hands of the assessee under the head "Capital gains" being the difference between the fair market value of the property as on the date of conversion as reduced by cost of acquisition and other deductions permissible u/s 48. In our opinion, this income chargeable under the head "Capital gain" cannot be set off against carried forward business losses as the same cannot be treated as profits and gains of the business of the assessee. The contention raised by the learned counsel for the assessee in this regard relying on the decision of Hon'ble Supreme Court reported in the case of Cocanada Radhaswami Bank Ltd. (supra), in our opinion, cannot be accepted as the interest income in the said cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fixed assets were being disposed of. He held that the business of the assessee company thus was closed for all practical purposes and accordingly the expenses claimed by the assessee relating to closed business on account of interest etc. were disallowed by him. On appeal, the learned CIT(Appeals) confirmed the said disallowance made by the AO after having found that the assessee company had stopped its activity of manufacturing the containers which was its principal business. He found that the assessee company was also trying to redevelop its land which clearly indicated that the manufacturing business was closed permanently without any intention to revive the same. 45. At the time of hearing before us, the learned counsel for the assessee raised an altogether new contention. He pointed out from the computation of total income placed on page No.1 of his paper book that a sum of Rs.18,42,423/- was offered by the assessee as its income u/s 41. He also pointed out that the loss of Rs.7,41,72,071/- as computed by the assessee in the computation of income was taken by the AO as starting point in the computation of total income made by him on page No.7 of the assessment order. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon by the learned counsel for the assessee is in the context of sub-section (2) of section 41 which deals with the money payable in respect of disposal of certain assets if it exceeds the written down value as further explained in section 41(2). Explanation to section 41(2) clarifies that the provision of sub-section (2) of section 41 shall apply as if the business is in existence in that previous year when the moneys become payable in respect of disposal of certain assets. The applicability of the said Explanation thus is limited only in the context of sub-section (2) of section 41 and the same is not applicable in the cases covered by sub-section (1) of section 41. In the present case, a perusal of the computation of total income placed at page No.1 of the assessee's paper book shows that the income was offered by the assessee on account of excess provision written back and sundry creditors' balance written back and its case thus was covered u/s 41(1) and not u/s 41(2) involving disposal of certain capital assets resulting in moneys payable as envisaged in section 41(2). Explanation to section 41(2) creating deeming fiction about the existence of business thus is not applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the AO and confirmed by the learned CIT(Appeals) on account of legal and professional charges paid for valuation of land. 50. We have heard the arguments of both the sides and also perused the relevant material on record. Although it is claimed by the assessee in its ground that valuation of land was done in connection with land development activity, it is observed from page no. 6 of the learned CIT(Appeals)' impugned order that by assessee's own submission, it had created charge on the land in favour of UTI Bank Ltd. as collateral security at the request of holding company which in turn had advanced Rs.50 crores to the assessee company. It was claimed by the assessee that the expenditure on valuation of the land thus was in the course of carrying the business and the same should be allowed as a deduction. The stand now taken by the assessee in the ground thus is contrary to the stand taken before the learned CIT(Appeals) and there being nothing brought on record before us to specifically establish that the valuation of land was made in connection with the land development activity, we find no merit in this ground raised by the assessee. The same is accordingly dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the developer to the assessee was exorbitant and excessive going by the normal business norms. He, therefore, concluded that the amount of Rs.2.38 crores paid to the assessee by the developer was nothing but part of sale consideration and the same was brought to tax by him in the hands of the assessee under the head "Capital Gains". 56. The matter was carried before the learned CIT(Appeals) and elaborate submission in writing was filed by the assessee before him challenging the addition of Rs.2.38 crores made by the AO on account of security deposit amount treating the same as sale consideration of property. From the said submission, the learned CIT(Appeals) noted the following relevant facts : "(i) In the financial year 2003-04 the appellant started negotiations with the Developers, M/s Gammon Neelkanth, for development of its property, and received an advance of Rs.2.38 crores. (ii) In the F.Y. 2003-04, it entered into an agreement with the above Developers, vide agreement dated 24-06-2005. As per the terms of the agreement, the Developers would be developing the owners property, as per the schedule given in the said agreement. By way of consideration for rights to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue. 58. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the amount of Rs.2.38 crores in question received by the assessee during the year under consideration was found to be not against reimbursement of any expenses by the learned CIT(Appeals). He also found that the said amount was subsequently adjusted against the total security deposit of Rs.38 crores agreed to be paid by the developers to the assessee as per the supplementary agreement and this entire amount of Rs.38 crores was refunded by the assessee to the developer. On these findings of facts recorded by the learned CIT(Appeals) after verifying the relevant details and documents furnished by the assessee, he came to the conclusion that the amount of Rs.2.38 crores was not a part of sale consideration as alleged by the AO and the same was not chargeable to tax in the hands of the assessee under the head "Capital Gain" as there was no transfer of asset by the assessee in the year under consideration. At the time of hearing before us, the learned DR has not been able to bring anything on record to controvert or rebut these findings of facts recorded b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on account of any notional commission which the assessee should have charged but did not charge actually. It was submitted that income-tax is leviable on income earned by the assessee and if there is no income which has been actually earned by the assessee, there can be no liability to tax on such hypothetical income. It was contended that the income sought to be taxed in the hands of the assessee must have arisen to him and the income that could have been earned but not earned or materialized, cannot be assessed to tax. Keeping in view this submission made by the assessee and the decisions of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC), CIT v. A. Raman Co. [1968] 67 ITR 11 (SC) cited in support, the learned CIT(Appeals) held that the addition made by the AO on account of commission amount of Rs.2.66 crores being only a notional income and not real income was not sustainable. Accordingly, the said addition was deleted by him. 62. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that its property was offered as collateral security by the assessee for the bank guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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