2024 (8) TMI 1577 - AT - Income Tax

LTCG - deemed transfer of land took place in pursuance of JDA - Year of taxability - assessee converted the capital asset into stock in trade by entering into JDA - whether provisions of section 2(47)(iv) or (v) of the Act is applicable to the impugned transaction if it is so applicable the assessment year in which it is to be taxed? - HELD THAT - As in the present case income has to be charged u/s 28 of the Act after conversion of capital asset into stock in trade and it has to consider the applicability of section 45(2) of the Act also which is applicable as the capital asset was already converted into stock in trade by entering into JDA on 17.1.2008. Once we apply section 2(47)(iv) of the Act as there was conversion of capital asset into stock in trade the income of the assessee to be computed by applying section 45(2) of the Act and there cannot be any application of section 2(47)(i) of the Act which refers to transfer in relation to capital asset including the sale exchange or relinquishment of the asset. There cannot be any exchange of the property in the present case as there was no existence of assets which has to be exchanged in relation to the transfer of land by the assessee at the time of entering into JDA on 17.1.2008. In other words to hold it as an exchange there should be existence of both the properties which are subject matter for exchange with each other at the time of entering into contract/JDA. In the present case at the time of entering into JDA on 17.1.2008 there was no existence of both the properties and that property to be came into existence in future date. Hence decision in the case of Orient Trading Company 1997 (1) TMI 2 - SUPREME COURT have no application to the facts and circumstances of present case. Being so it cannot be said that section 2(47)(i) of the Act is having any application to the facts of present case. Thus we hold that section 2(47)(i) of the Act have no application. Accordingly we decide the issue in favour of the assessee. How to compute the income of the assessee arisen out of JDA dated 17.1.2008 - For applying section 45(2) of the Act there must be a capital asset and capital gains shall be computed in the year when such converted asset is sold. Although conversion of a capital asset into stock in trade is treated as transfer in relation to the capital asset in terms of 2(47)(iv) of the Act. But section 45(2) of the Act provides that capital gain or loss shall be calculated on such converted asset in the year in which such asset is actually sold. In other words although the transfer of capital asset in case of its conversion into stock in trade is deemed to have taken place in the year of conversion but the capital gain or loss is computed in the year of sale of such asset. Hence the indexation of cost of acquisition and improvement will be done by considering the cost of indexation in the year of conversion while calculating the capital gain or loss relevant to the assessment year 2008-09. Now the question arises with regard to sale consideration which is to be computed while calculating the capital gain or loss. As per section 45(2) of the Act for computing the capital gain the sale consideration will be equivalent to the fair market value of such asset as existing on the date of conversion and FMV has been considered in terms of section 2(22B) of the Act. Computation of business income after conversion of capital asset into stock in trade - The assessee income has to be computed u/s 45(2) of the Act when the stock in trade has been actually sold by the assessee and not in the assessment year when the developer has got the OC/CC from the BBMP. At this time it is appropriate to take support from the judgement of Dhanuka Sons 1978 (7) TMI 22 - CALCUTTA HIGH COURT where it has been held that profit gains arising from shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because a person have a transaction with himself and in turn such profit cannot be taxed. If such shares can be disposed at a value other than the value at which it was transferred from the business stock the question of capital loss or capital gain would arise. There cannot be any taxability of income in the assessment year 2017-18 as there was no whole or part sale of stock in trade in the assessment year under consideration. In view of the above discussion this ground No. 2 of appeals of the assessee is allowed. Non-issue of notice u/s 143(2) after recording satisfaction u/s 153A of the Act on 24.3.2020 - AO was bound to issue a Notice u/s 143(2) of the Act before completion of the assessment. In view of the above position of facts and law we are of the view that the reassessments (for both years in appeal before us) framed in the present case without issuance of notice under section 143(2) of the Act is bad in law and void ab-initio. Assessment completed u/s 153C without issuing notice u/s 143(2) after recording satisfaction u/s 153C of the Act though the said notice u/s 143(2) of the Act was issued before recording satisfaction u/s 153C - notice u/s 143(2) of the Act has been issued by the ACIT Central Circle-2(3) Bangalore after the case of assessee was centralized post search that took place in the place of M/s. Brigade Enterprises. The same is very clear from the satisfaction note recorded by the ld. AO which is much after the date of issuance of notice u/s 143(2) of the Act. It is also noted that the assessment order was completed by the ld. AO u/s 153C r.w.s. 144 of the Act on 12.7.2021. It is implicit that the Central Circle who passed the assessment order u/s 153C of the Act assume jurisdiction only upon transfer of case from ITO Ward 5(2)(4) Bangalore vide order dated 17.7.2018. Thus it was a necessity that before issuance of notice u/s 143(2) of the Act ld. AO should have recorded the satisfaction for initiating proceedings u/s 153C of the Act. It is not happened in the present facts of the case. Hence on this count also the assessment order is bad in law and to be quashed. Accordingly we quash the impugned assessment orders. Application of section 45(5A) - AO of the opinion that assessee got Occupancy Certificate on 21.7.2016 and by taking the clue from section 45(5A) of the Act he brought the income arising out of this transaction in the assessment year 2017-18 and applicable for AY 2018-19 only - AO cannot invoke provisions of section 45(5A) of the Act which was introduced by Finance Act 2017 w.e.f. 1.4.2018. Further it is applicable to an assessee who is an individual or Hindu Undivided Family from the transfer of capital asset being land and building or both under the specified agreement for the purpose of obtaining of capital gain. In the present case the assessee neither individual or HUF and the income is not only chargeable under the head Capital Gain . Assessee is a partnership firm and the income emanated from the impugned JDA is chargeable under the head capital gain as well as business income as there was a conversion of capital asset into stock in trade and the provisions of section 45(2) of the Act is applicable. Thus the provisions of section 45(5A) of the Act cannot be invoked in the present case. as we already held in earlier para while disposing of the ground No. 2 in this order that there was no application of section 45(5A) of the Act as this section was inserted by Finance Act 2017 w.e.f 1.4.2018. In view of this we allow the ground No. 8 in these appeals. Determining the extent of Built-up area including the Car parking slot and area attributable to MLCP Block which is situated in the Stilt Floor not intended to be sold - Income generated from this transaction to be computed while on actual sale of super built up area allotted to the present assessee along with parking area.

Summary

The core legal questions considered by the Tribunal in these appeals pertain to: (1) the year of chargeability of income arising from a Joint Development Agreement (JDA) involving conversion of land (a capital asset) into stock-in-trade and subsequent development; (2) the applicability and interpretation of provisions under sections 2(47)(iv), 2(47)(v), 45(2), 45(5A), 143(2), 153B, and 153C of the Income Tax Act; (3) the validity and limitation of time for issuance of notices and completion of assessment under sections 143(2) and 153C; (4) the correctness of taxing the income as business income in the assessment year 2017-18 based on occupancy and completion certificates; (5) the applicability of judicial precedents including Supreme Court and High Court decisions on the timing and nature of transfer under JDAs; (6) the appropriate valuation of consideration for computation of income; and (7) accounting treatment of stock-in-trade and related valuation issues.

Regarding the year of chargeability and nature of income, the Tribunal examined the legal framework under sections 2(47)(iv) and (v) and section 45(2) of the Income Tax Act. Section 2(47)(iv) defines "transfer" to include conversion of a capital asset into stock-in-trade, while section 45(2) provides that profits or gains arising from such conversion are chargeable as income in the previous year in which such stock-in-trade is sold or otherwise transferred, with the fair market value on the date of conversion deemed as full value of consideration. Section 2(47)(v) relates to transfer involving possession under contracts covered by section 53A of the Transfer of Property Act (TOPA). The Tribunal extensively analyzed the JDA dated 17-01-2008 and related General Power of Attorney (GPA) documents to determine whether the conditions under section 53A TOPA were satisfied, thereby constituting a transfer under section 2(47)(v).

The Tribunal relied on precedents including the Bombay High Court decision in Chaturbhuj Dwarkadas Kapadia v. CIT, which held that the date of execution of the JDA and GPA, if registered and conferring possession and rights to the developer, constitutes transfer under section 2(47)(v). The Tribunal also considered ITAT decisions such as Jaico Automobile Engineering Company Pvt. Ltd. and Tamilnadu Brick Industries, which supported the view that execution of JDA with irrevocable GPA granting possession and development rights amounts to transfer for capital gains taxation. However, contrary precedents from Hyderabad ITAT were also noted, which held that mere execution of JDA without commencement of construction or performance by the developer does not amount to transfer under section 2(47)(v).

Applying these principles, the Tribunal found that the assessee had converted the capital asset (land) into stock-in-trade by entering into the JDA on 17-01-2008 with the developer, granting possession and irrevocable powers to the developer. The Tribunal held that the capital gain arising from this conversion was chargeable in the assessment year 2008-09, the year of conversion, and not in the assessment year 2017-18 as held by the Assessing Officer (AO) and CIT(A). The Tribunal distinguished the Supreme Court decision in Oriental Trading Co. Ltd. v. CIT, which involved exchange of shares in a merger and was not applicable to the facts of the present case involving stock-in-trade conversion and JDA. The Tribunal emphasized that section 45(5A), introduced by Finance Act 2017 and applicable only to individuals and Hindu Undivided Families (HUFs) for JDAs executed on or after FY 2016-17, was not applicable to the assessee, a partnership firm, and hence could not be invoked for taxing income in AY 2017-18.

On the issue of taxation of income in AY 2017-18 based on occupancy certificate dated 21-07-2016, the Tribunal noted that the AO had wrongly treated the date of obtaining the occupancy certificate as the date of transfer or exchange of assets. The Tribunal found that the transfer of stock-in-trade had already taken place in FY 2007-08 relevant to AY 2008-09, and the subsequent possession or receipt of constructed area did not trigger chargeability of income in AY 2017-18. The Tribunal relied on the advance ruling in Jasbir Singh Sarkaria, which held that receipt of consideration is not a criterion for capital gains tax exigibility; the transfer or deemed transfer is the relevant event. The Tribunal accordingly held that income arising from the JDA was to be computed under section 45(2) as business income in the year of actual sale of stock-in-trade and not in AY 2017-18.

On the issue of limitation and validity of notices, the Tribunal analyzed the provisions of sections 153B and 153C relating to assessment following search and seizure. The search on M/s Brigade Enterprises Ltd. was conducted on 02-11-2017 and concluded on 28-12-2017. The case of the assessee was notified on 17-07-2018. The AO issued notice under section 143(2) on 24-09-2018 and later issued notice under section 153C on 24-03-2020 after recording satisfaction on the same date. The Tribunal observed that the AO had initiated assessment proceedings by issuing notice under section 143(2) before recording satisfaction under section 153C, which is contrary to the statutory scheme requiring satisfaction to be recorded before issuing notice under section 153C. The Tribunal held that the assessment completed under section 153C without recording satisfaction prior to issuance of notice under section 143(2) was invalid and void ab initio.

Further, the Tribunal considered the limitation period under section 153B, which prescribes a period of nine months from the end of the financial year in which seized documents are handed over to the AO or the period specified under clauses (a) or (b), whichever is later. The Tribunal found that the assessment order dated 12-07-2021 was beyond the prescribed limitation period reckoned from 24-09-2018 (date of notice under section 143(2)) and thus barred by limitation. The Tribunal, however, kept the question of limitation open for future adjudication as the assessment was already held void on other grounds.

The Tribunal also dealt with the issue of non-issuance of mandatory notice under section 143(2) after filing of return of income in response to notice under section 153C. The assessee had filed return on 26-02-2021 but it was not e-verified. The AO treated the return as invalid and completed assessment under section 153C read with section 144. The Tribunal referred to Supreme Court decisions in ACIT v. Hotel Blue Moon and CIT v. Laxmandas Khandelwal, which held that non-issuance of notice under section 143(2) within prescribed time renders assessment void and such defect is incurable. The Tribunal also cited coordinate bench decisions of ITAT Bangalore following these precedents. The Tribunal rejected the CIT(A)'s reliance on Madras High Court decision in B. Kubendran, which held notice under section 143(2) is not mandatory in section 153A/C cases, on the ground that in the present case the AO had sufficient time after filing of return to issue notice under section 143(2). The Tribunal held that the AO's failure to issue notice under section 143(2) after return filing rendered the assessment void ab initio.

Regarding valuation of consideration for computation of income, the Tribunal noted that the CIT(A) directed the AO to adopt guideline value/circle rate of Rs. 3,085.50 per sq.ft. for the built-up area, which was not available at the time of AO's assessment. The Tribunal held this approach reasonable and allowed the ground of appeal challenging the AO's higher valuation. The Tribunal also allowed the ground relating to inclusion of car parking slots and MLCP block area in valuation, holding that income computation should be on actual sale of super built-up area including parking area, consistent with section 45(2) principles.

On accounting treatment, the Tribunal accepted the assessee's submission that crediting closing stock value requires corresponding debit entry as per double entry accounting, making the transaction revenue neutral. The Tribunal allowed the ground challenging the CIT(A)'s treatment which ignored this principle.

In conclusion, the Tribunal held that: (i) the capital asset (land) was converted into stock-in-trade by the assessee on 17-01-2008 by entering into JDA and irrevocable GPA with the developer, constituting transfer under section 2(47)(iv); (ii) the capital gain arising from such conversion is chargeable in AY 2008-09 under section 45(2), with business income arising on sale of stock-in-trade taxable in the year of sale, not in AY 2017-18; (iii) provisions of section 45(5A) are not applicable to the assessee, a partnership firm, and to JDAs executed prior to FY 2016-17; (iv) the assessment completed under section 153C without prior recording of satisfaction and without issuance of mandatory notice under section 143(2) after return filing is void ab initio; (v) the assessment is barred by limitation under section 153B; (vi) valuation of consideration should be based on guideline/circle rates and actual sale area excluding non-saleable areas; and (vii) accounting principles of double entry system require recognition of debit entries corresponding to closing stock credits, rendering the transaction revenue neutral until actual sale.

Accordingly, the Tribunal allowed the appeals of the assessee, set aside the impugned assessments, and dismissed the stay petitions as infructuous.