2017 (11) TMI 1811 - AT - Income Tax

Year of taxability of capital gain u/s 45(2) - land was treated by the assessee as her stock-in-trade - assessee entered into the development agreement-cum-GPA - HELD THAT - Assessee entered into a business agreement for development of her piece of land. The year in which conversion of capital asset into stock-in-trade has taken place is not known nor is it the year before us. Where any capital asset is converted in to stock-in-trade the income would arise u/s 45(2) only in the year when the stock-in-trade is transferred/sold by the assessee. There is no doubt that during the relevant financial year the assessee has entered into a development agreement only by contributing the land as her share of capital while the developer was to invest in construction of the villas. The income would arise to the assessee only 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.

Summary

Issues:
1. Addition made under the head business income
2. Recognition of capital contribution and business income
3. Transfer of stock in trade and commercial transaction
4. Consideration of development agreement and rights on land
5. Mercantile system of accounting and security deposit
6. Appeal against CIT(A) order

Analysis:

Issue 1 - Addition made under the head business income:
The Revenue contested the deletion of an addition made under the head business income of a substantial amount in the appeal before the ITAT. The CIT(A) had granted relief to the assessee, leading to the Revenue's appeal. The dispute revolved around the treatment of income arising from a development agreement-cum-General Power of Attorney between the assessee and a company. The Revenue argued for the addition, while the assessee maintained that no taxable gains had accrued during the relevant year.

Issue 2 - Recognition of capital contribution and business income:
The Revenue contended that the capital contribution by the assessee in the form of land should be considered as business income, as the developer would contribute to the construction of residential apartments. However, the ITAT found that the conversion of a capital asset into stock-in-trade does not result in income until the stock-in-trade is sold. As the assessee had only contributed land as capital, without selling it, no gains were deemed to have arisen during the year in question.

Issue 3 - Transfer of stock in trade and commercial transaction:
The ITAT examined the transfer of stock-in-trade by the assessee to the developer under a commercial project. It was determined that income would only arise when the stock-in-trade is sold, not when it is contributed as capital. The development agreement did not lead to taxable gains for the assessee during the relevant year, as per legal provisions and the CIT(A)'s decision.

Issue 4 - Consideration of development agreement and rights on land:
The ITAT considered the development agreement and the rights of the assessee on the land. It was noted that the agreement involved the conversion of the land into stock-in-trade for future sale, but no actual sale occurred during the relevant year. The assessee's contribution of land as capital did not trigger immediate taxable gains, aligning with the CIT(A)'s decision.

Issue 5 - Mercantile system of accounting and security deposit:
The Revenue argued that the assessee, following the mercantile system of accounting, received a security deposit that should be considered as business income. However, the ITAT upheld the CIT(A)'s decision that no taxable gains arose from the security deposit during the relevant year, as it was part of the overall development agreement and not a direct income.

Issue 6 - Appeal against CIT(A) order:
After evaluating the contentions and evidence, the ITAT dismissed the Revenue's appeal and upheld the CIT(A)'s decision to grant relief to the assessee. The ITAT concluded that no taxable gains accrued to the assessee during the relevant year based on the nature of the development agreement and the treatment of the land as stock-in-trade without actual sale.

In conclusion, the ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal and ruling in favor of the assessee regarding the treatment of business income arising from the development agreement.