2020 (8) TMI 710 - AT - Income Tax

Cash deposit in the bank account - sufficient cash was not in hand as per cash book - AO made an addition u/s 69 read with section 115BBE - assessee has contended before the LD. CIT (A) that without giving show cause notice and opportunity to explain the availability of cash, the addition made by the AO - CIT-A deleted the addition - HELD THAT - AO has made the addition on the basis of copy of the cash balance in the cash book on a particular date. It is manifest from the assessment order that the AO has not issued any show cause notice to the assessee or even asked the assessee to explain the source of cash deposit in the bank account. Thus the entries made in the cash book from 14.11.2015 to 17.11.2015 were considered by the LD. CIT (A) and it was found that it was only a genuine mistake on the part of the Data Entry Operator who has made the entry of 17.11.2015 instead of 16.11.2015. As no contrary material brought before us, we do not find any error or illegality in the impugned order of LD. CIT (A). Gain on sale of land - LTCG or business income - HELD THAT - Initially the assessee has invested in the land in question, however, subsequently when the assessee has decided to develop the residential colony on this land then the capital asset has been converted into stock-in-trade. Bifurcation of the profit arising from the sale of the plots of land ought to have been based on the FMV on the date when the assessee has decided to develop the land into residential colony. The timing and date of such conversion is taken by the LD. CIT(A) as on 1st day of financial year 2015-16 i.e. 01.04.2015. The said date is not the actual date coming from the relevant material/record. The preparation of the site plan for developing the colony shall be the actual date of conversion of the agricultural land into stock-in-trade. CIT(A) has not examined this issue as on when the capital asset was converted into stock-in-trade. The LD. CIT(A) has just taken the 1st day of previous year relevant to assessment year as the date of conversion which is not based on any documentary evidence. Computation of capital gain as well as the business income arising from the sale of land is dependent on the fair market value of the undeveloped land in question on the date when the assessee decided to develop the land. The documentary evidence on this point would be the lay out plan prepared by the assessee or any other document which was prepared by the assessee for the purpose of development of the land. Therefore, the bifurcation and computation of Long Term Capital Gain and Business income requires a proper verification and re-consideration. Accordingly we set aside this limited issue to the record of the AO for determining the actual date of conversion of the capital asset into stock-in-trade and then apply the provisions of section 45(2) of the IT Act to bifurcate the profit into Long Term Capital Gain and Business income. Deduction under section 54F - CIT (A) has not considered this issue. AO has denied the claim solely on the ground that the profit on sale of the land is Business income whereas the LD. CIT (A) has not adjudicated this issue while passing the impugned order. Accordingly the AO is directed to examine the claim of deduction under section 54F and then decide the same after giving an opportunity of hearing to the assessee. Income arising from sale of shops - CIT (A) has allowed the claim of the assessee as Income from Capital gain, we find that once the assessee has decided to develop the land by construction of shops for the purpose of sale, then a different para meter cannot be applied as applied in the case of development of land in a residential colony. Accordingly, the profit arising from the sale of shops is also required to be bifurcated as per the provisions of section 45(2) - AO has to compute the capital gain as well as the Business income in view of our observations as regards the conversion of the agricultural land into residential colony. Appeal of the revenue is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Deletion of addition of ?1,01,774/- made by the AO on account of cash deposited in the bank account.
2. Treatment of ?4,07,77,191/- as business income instead of Long Term Capital Gain of ?3,51,17,040/- declared by the assessee.

Issue-wise Detailed Analysis:

Issue 1: Deletion of Addition of ?1,01,774/-

The AO made an addition of ?1,01,774/- under section 69 of the IT Act read with section 115BBE, citing a negative cash balance in the cash book on the date of cash deposit. The assessee contended that the addition was made without a show cause notice or an opportunity to explain the source of cash deposited. The assessee further explained that the discrepancy was due to a wrong entry by the data entry operator.

The LD. CIT (A) deleted the addition, considering it a genuine mistake. The Tribunal upheld this decision, noting that the AO did not issue any show cause notice or request an explanation from the assessee. The Tribunal found no error or illegality in the LD. CIT (A)'s order, which concluded that the error was a genuine mistake by the data entry operator.

Issue 2: Treatment of ?4,07,77,191/- as Business Income

The AO treated the income from the sale of plots and shops as business income, denying the deduction under section 54F. The AO argued that the assessee's activities of developing a residential colony and selling plots constituted a business activity. The LD. CIT (A) partially agreed, bifurcating the income into Long Term Capital Gain and Business income under section 45(2) of the IT Act.

The Tribunal noted that the assessee initially purchased agricultural land as an investment and later developed it into a residential colony. The Tribunal agreed with the principle that the capital asset was converted into stock-in-trade but found that the LD. CIT (A) did not determine the actual date of conversion based on documentary evidence. The Tribunal set aside the issue to the AO for determining the actual date of conversion and applying section 45(2) to bifurcate the profit.

Deduction under Section 54F:

The Tribunal directed the AO to examine the claim of deduction under section 54F, as the LD. CIT (A) did not consider this issue. The AO is to decide after providing an opportunity for hearing to the assessee.

Income from Sale of Shops:

The Tribunal found that the profit from the sale of shops should also be bifurcated under section 45(2), similar to the development of the residential colony. The AO is to compute the capital gain and business income accordingly.

Conclusion:

The appeal of the revenue is partly allowed for statistical purposes, and the Cross Objection of the assessee is dismissed. The AO is directed to re-examine the issues based on the Tribunal's observations. The order was pronounced in the open court on 10/08/2020.