2025 (6) TMI 1748 - AT - Income Tax

Conversion of capital asset into stock in trade - year of taxability of the amount in dispute - income arising from the exchange of land held as stock in trade for constructed commercial complex under a Joint Development Agreement (JDA) - HELD THAT - As admitted position of fact that the assessee has got the Occupancy Certificate with respect to completion of building of the developed area on 21.7.2016. It is also an admitted position of fact that the coordinate bench of the ITAT in assessee s own case cited 2024 (8) TMI 1577 - ITAT BANGALORE has categorically observed that year of taxability is not assessment year 2017-18 and it is the year when the assessee has sold the whole or part of the building. Now the only issue which we require to adjudicate in departmental appeal is whether the ld. CIT(A) is correct in directing the AO to take the value at Rs. 3085.50 ps. Per sq ft. We are of the view that ld. CIT(A) is not an expert for valuation purposes therefore this matter is to be referred to the valuation cell by the assessing officer to ascertain the correct valuation of the developed area and also the year of taxability of the amount in dispute. AO will also examine in which year the assessee has sold the premises and has offered the income attributable to such sale. With these observations we restore this matter to the file of AO for examining afresh with a direction that the matter may be referred to the departmental valuation officer to decide in accordance with law.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the income arising from the transaction involving exchange of land (held as stock in trade) for constructed commercial complex under a Joint Development Agreement (JDA) is taxable as business income in the year of exchange (assessment year 2017-18) or only upon actual sale of the constructed property.

- Whether the provisions of Section 45(2) of the Income Tax Act, 1961 apply to the conversion of capital asset into stock in trade and subsequent sale, and how the income should be computed and taxed accordingly.

- Whether the Assessing Officer (AO) was justified in taxing the difference in value between the constructed area received and the land given over as business income in AY 2017-18.

- Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in directing the AO to adopt a guideline value of Rs. 3085.50 per sq.ft. for valuation of the constructed area without any scientific basis or rationale.

- Whether the additional ground raised by the revenue regarding the valuation adopted by CIT(A) is admissible and merits consideration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of income arising from exchange of land for constructed property under JDA and timing of such taxability

Relevant legal framework and precedents: Section 45(2) of the Income Tax Act deals with capital gains arising from conversion of capital asset into stock in trade. The provision mandates that the fair market value of the asset on the date of conversion shall be deemed to be the full value of consideration for capital gains computation, and the subsequent sale of stock in trade is taxed as business income. The coordinate bench of ITAT in the assessee's own case and the Madras High Court ruling in M/s Essrope Mills Ltd. clarify that capital gain on conversion is taxable at the time of conversion, and business income arises only upon sale of stock in trade.

Court's interpretation and reasoning: The Court observed that the land was originally a capital asset converted into stock in trade on 7.1.2008 (AY 2008-09). The capital gain on such conversion is to be computed using the fair market value on the date of conversion as deemed sale consideration. The subsequent exchange of land for constructed area under JDA does not constitute a sale of stock in trade; hence, no business income arises in AY 2017-18 when the Occupancy Certificate was obtained. The business income will arise only when the constructed property (stock in trade) is actually sold.

Key evidence and findings: The JDA dated 7.1.2008, the date of conversion of capital asset into stock in trade, the possession of Occupancy Certificate on 21.7.2016, and the absence of any sale of constructed area in AY 2017-18 were critical facts. The coordinate bench's detailed analysis confirmed that no sale of stock in trade occurred in AY 2017-18.

Application of law to facts: The AO's approach to treat the difference in value between constructed area and land as business income in AY 2017-18 was contrary to Section 45(2). The Court relied on precedents, including the Kolkata High Court decision in CIT vs. Dhanuka & Sons, which held that transfer of asset within the same person does not trigger taxability. Therefore, the income should be taxed as capital gain at conversion and business income only upon actual sale of stock in trade.

Treatment of competing arguments: The revenue argued for immediate taxation of the difference in value as business income in AY 2017-18. The assessee contended for taxation only upon sale of constructed property. The Court sided with the assessee, emphasizing statutory provisions and judicial precedents.

Conclusions: No business income arises in AY 2017-18 merely due to exchange under JDA or obtaining Occupancy Certificate. Taxability of business income is deferred to the year of actual sale of constructed property.

Issue 2: Validity of CIT(A)'s direction to AO to adopt guideline value of Rs. 3085.50 per sq.ft. for valuation

Relevant legal framework and precedents: Valuation of property for income computation must be based on reliable data, scientific methods, and expert opinion. CIT(A) is not a valuation expert and should not substitute valuation officer's role. Proper procedure requires reference to the departmental valuation officer for ascertainment of fair market value.

Court's interpretation and reasoning: The Court noted that CIT(A) directed adoption of Rs. 3085.50 per sq.ft. value without any basis or rationale, and without consulting the AO or valuation experts. Since CIT(A) is not an expert in valuation, the Court held that the matter should be referred back to the AO for fresh examination and reference to the valuation cell.

Key evidence and findings: The absence of any scientific method or rationale supporting the Rs. 3085.50 per sq.ft. rate, and the timing of the additional ground raised by revenue after hearing completion were considered.

Application of law to facts: The Court applied principles of natural justice and valuation norms, holding that valuation must be determined by competent authority with adequate opportunity to the assessee. The AO was directed to refer the matter to valuation officer and decide the value in accordance with law.

Treatment of competing arguments: The revenue argued that CIT(A)'s direction was baseless and unsupported. The assessee relied on CIT(A)'s order. The Court found merit in revenue's contention and rejected CIT(A)'s valuation direction.

Conclusions: CIT(A)'s direction to adopt Rs. 3085.50 per sq.ft. is set aside. The matter is remitted to AO for fresh valuation determination by departmental valuation officer with due process.

Issue 3: Admissibility of additional ground raised by revenue regarding valuation

Relevant legal framework and precedents: Additional grounds of appeal filed after hearing are generally not admitted unless in the interest of justice and with explanation for delay.

Court's interpretation and reasoning: The additional ground was filed after completion of hearing. The Court admitted the additional ground in the interest of justice, considering the explanation for delay provided by revenue.

Key evidence and findings: The timing of filing the additional ground and the explanation for delay were examined.

Application of law to facts: The Court balanced principles of natural justice and procedural fairness, admitting the ground to ensure comprehensive adjudication.

Treatment of competing arguments: The assessee objected to admission; revenue supported it. The Court admitted the ground.

Conclusions: Additional ground on valuation is admitted and decided on merits.

3. SIGNIFICANT HOLDINGS

- "The gain on transfer of capital asset up to the date of conversion into stock in trade has to be assessed under the head capital gain and the gain in respect of property i.e. after the date of conversion into stock in trade has to be assessed as business income."

- "In our opinion, 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."

- "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."

- "Ld. CIT(A) is not an expert for valuation purposes, therefore, this matter is to be referred to the valuation cell by the assessing officer to ascertain the correct valuation of the developed area."

- "The AO will also examine in which year the assessee has sold the premises and has offered the income attributable to such sale."

- The additional ground raised by revenue regarding valuation was admitted in the interest of justice despite being filed post hearing.

- The appeals of the revenue are allowed for statistical purposes, and the matter is restored to AO for fresh adjudication on valuation and year of taxability consistent with the Court's directions.