TMI Blog2009 (7) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the provisions of s. 2(47) which is applicable only in case of capital asset. As per s. 2(14), capital asset does not include stock-in-trade. Therefore, once the capital asset is converted into stock-in-trade, the provision of s. 2(47) becomes irrelevant and does not apply. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property as held by the Hon'ble apex Court in the case of Alapati Venkataramiah [ 1965 (3) TMI 21 - SUPREME COURT] Until and unless the title of the property is passed on to the purchaser, there cannot be a sale or transfer of immovable property, since in the present case the question is whether the handing over of the possession under the development agreement of the property which is stock-in-trade of the assessee can be treated as a transfer by applying the definition of transfer in s. 2(47) of the IT Act, 1961. As we have already stated earlier that in the case of stock-in-trade, the definition of transfer under s. 2(47) of the IT Act, 1961 is not applicable, therefore, the contextual or the ordinary meaning of the word transfer is applicable in the present case. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee on the ground that when the assessee has not admitted the capital gain on self-occupied portion in the asst. yr. 2004-05 of the property, there is no question of deduction under s. 54F - HELD THAT:- Since, we have decided the issue of chargeability of the capital gain in favour of the assessee, then consequently the claim of exemption u/s. 54F is also allowable as per law. It is clear from the record that, the development of the property was for residential purpose and therefore when the property was constructed as a residential building. Accordingly, we allow the claim. Sale value of the built-up area - the assessee has sold 7,860 sq, ft. of built-up area with the land - adopted the sale value @ ₹ 2,079 per sq. ft. in the return of income - The AO found that as certified by the engineers, M/s Britto, Ilango Associates, the value of the built-up, area and the land was ₹ 2,200 per sq. ft. The AO accordingly adopted the sale value at ₹ 2,200 per sq. ft. On appeal, the CIT(A) confirmed the rate adopted by the AO - HELD THAT:- When there is no dispute regarding the sale consideration adopted by the assessee as mentioned in the sale document, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief under s. 54F, as the agreement with the developer to receive built-up area in lieu of consideration for transfer amounted to the qualified investment in constructed residential building, in the facts and the circumstances of the case in law. (IV) The learned CIT(A) has erred in confirming the estimation of sale value of the stock-in-trade by the appellant at ₹ 2,200 per sq. ft. without bringing on record any material to support that the appellant would have received higher than the stated consideration in the documents supporting the sale. (V) The leained CIT(A) has erred in rejecting the computation of long-term capital loss on sale of shares held by the appellant for the reasons stated in his order in the facts and the circumstances of the case. 3. Issue No. 1 : Regarding bringing to tax the entire long-term capital gain arising on transfer of land: In the revised return of income, the assessee declaring the long-term capital gain at ₹ 53,73,705. In the scrutiny assessment, the AO determined the long-term capital gain at ₹ 3,67,59,418. The controversy is regarding the land measuring 44,000 sq. ft. which the assessee had converted this land i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the long-term capital gains also should have been assessed proportionately in these two years and not in one single assessment year (i.e.) asst. yr. 2004-05. The learned Authorized Representative in submissions dt. 7th June, 2007 has reiterated the appellant's claim that the LTCG on land should have been assessed proportionately in asst. yrs. 2004-05 and 2005-06 and not entirely in asst. yr. 2004-05 as has been done by the AO. 4. The CIT(A) did not accept the contention of the assessee and held that since the possession of land was handed over to the developer in pursuant of the agreement dt. 1st Sept., 2003, the capital asset (viz.) the land stands transferred in accordance with the provisions of s. 2(47) of the IT Act, 1961 read with s. 53A of Transfer of Property Act and upheld the action of the AO in computing the long-term capital gain on land in the asst. yr. 2004-05. 5. Before us, the learned Authorized Representative of the assessee has submitted as under: (1) It is an undisputed fact that the appellant had converted the capital asset into stock-in-trade as on 1st Sept., 2003. This is a transfer of capital asset as defined in s. 2(47)(iv) of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961 in relation to a 'capital asset'. (9) It would therefore not be possible to sell the stock-in-trade, if it did not exist with the appellant, during the previous year relevant to the asst. yr. 2005-06. The existence of stock-in-trade for sale during the two years, though not disputed by the authorities below and confirmed by the conveyance by way of sale through registered sale deeds in the asst. yr. 2005-06, as stated above has added to the total income and included in the assessment for the asst. yr. 2004-05, the relevant portion of capital gains under s. 45(2), actually attributable to the asst. yr. 2005-06. (10) It is also factually not correct to say that the developer, under the agreement had entered into a transaction with the appellant involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to s. 53A of the Transfer of Property Act, 1882, in the facts and circumstances of the case and in law. 6. He has relied upon the following decisions: (a) Vania Silk Mills (P) Ltd. v. CIT [1991] 98 CTR (SC) 153 : [1991] 191 ITR 647 (SC); (b) Ghanshyamdas KishanCha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nverted the asset (i.e. land) into stock- in-trade on 1st Sept., 2003, it will not alter the position since even as per s. 45(2), the capital gain upto the date of conversion has to be computed. In this case as per s. 2(47)(v) transfer of land was over on 1st Sept., 2003 and capital gain arises on that day. Even under the head Business income income accrues on that day since assessee is following mercantile system of accounting and by entering into an agreement by which assessee performed his part (by conveying the asset) and receiving the consideration in the form of constructed area (a part of which was sold during the year itself). He has further submitted that the decisions of this Tribunal in the case of Dy. CIT v. Crest Hotels Ltd. (supra) and in the case of Octavius Steel Co. Ltd. v. Asstt. CIT (supra) are not applicable in the facts of the present case. He has relied upon the following decisions: (a) Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 180 CTR (Bom.) 107: [2003] 260 ITR 491 (Bom); (b) Jasbir Singh Sarkaria. In re [2007] 212 CTR (AAR) 107 : [2007] 294 ITR 196 (AAR); (c)Order of the Tribunal, Chennai Bench in ITA No. 1753/Mad/2005, dt. 25th July ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocument executed by the assessee. The AO treated the transaction of handing over of the possession of the land and building to the developer as transfer under s. 2(47) of the IT Act, 1961. The CIT(A) also held that the capital asset stands transferred in accordance with the provisions of s. 2(47) r/w s. 53A of Transfer of Property Act. In our view, the lower authorities have not taken a correct view by analyzing the transaction by applying the provisions of s. 2(47) of the IT Act, 1961 which is applicable only in case of capital asset. As per s. 2(14) of the IT Act, 1961, capita! asset does not include stock-in-trade. Therefore, once the capital asset is converted into stock-in-trade, the provision of s. 2(47) of the IT Act, 1961 becomes irrelevant and does not apply. The learned Departmental Representative has contended that (when) the transfer of immovable property satisfies the conditions of s. 53A of the Transfer of Property Act, then the transaction of transfer is complete. He has urged that in the case in hand, s. 53A of Transfer of Property Act applies and despite the conversion of the property into stock-in-trade, transaction of handing over of possession of land and buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade is sold or otherwise transferred. Therefore, the time of chargeability to income-tax of capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-trade is sold or otherwise transferred, whereas the chargeability of capital gain under s. 45 of the IT Act, 1961 from transfer of capital asset shall be in the previous year in which the transfer took place including the transfer as provided under s. 2(47) of the IT Act, 1961. The sale/transfer of stock-in-trade cannot be equated with the transfer of capital asset. The decisions relied upon by the learned Departmental Representative as well as the lower authorities are with respect to the transfer of capital asset under s. 2(47) of the IT Act, 1961 and not in respect of stock-in-trade. Therefore, these decisions are not relevant and applicable in the facts of the present case. As far as s. 53A of the Transfer of Property Act is concerned, the said section provides only a protection to the transferee on fulfilment of certain conditions provided therein but does not provide that even on fulfilment of that condition the transfer is complete. As per provision of s. 53A of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sale. When the legal title and possession of the property were with the assessee, then the transfer of the said is not possible merely by allowing the developer to carry out the construction work. 11. In the case of Ghanshyamdas Kishan Chander v. CIT (supra), the Hon'ble Andhra Pradesh High Court has observed as under: 'The definition of 'transfer' in relation to a capital asset under the IT Act is different from the transfer of any interest in specific immovable property. Sec. 58(a) of the Transfer of Property Act defines 'mortgage' as the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan The transfer of an interest in specific immovable property is different from the transfer of the totality of interest in respect of a capital asset. The Sovereign Parliament, in our view designedly used the expressions sale , exchange , relinquishment of the asset , extinguishment of any rights in the asset and the compulsory acquisition of an asset under any law in the definition of transfer under s. 2(47) of the IT Act. The definition is so clear as to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accrual of capital gains in case where capital asset is converted into stock-in-trade and the arisal of tax liability thereon. As per s. 45(1) capital gain arises on transfer of capital asset. Also, as per the said section, capital gain is chargeable to tax in the previous year in which the transfer takes place. As per s. 2(14), capital asset does not include stock-in-trade. As per the inclusive definition of the term 'transfer' given in s. 2(47) of the IT Act, sale is one of the several modes of transfer. Conversion of capital asset into or its treatment as stock-in-trade of the business carried on by the assessee is another mode of transfer as per the said definition. Sec. 45(2) acts as an exception to s. 45(1). It (i.e. s. 45(2)) provides that capital gain arising on account of conversion of capital asset into or its treatment as stock-in-trade (hereinafter referred to as 'conversion' for short) shall be chargeable to tax in the previous year in which such stock-in-trade sold or otherwise transferred. 10. With this background let us consider the facts in the present case. In the case before us, conversion had taken place in June, 1986. As noted above, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce cannot be accepted. By assessee's own action, the asset had assumed the characteristic of stock-in-trade. Hence when business profit on sale of such stock accrues to the assessee, tax on eapital gain also will be levied in the same year as is envisaged by s. 45(2), In such an event, all the arguments relating to conveyance, possession, etc., which are generally related to transfer of eapital asset are rendered meaningless. 1 2. In the instant case, the assessee itself having recognized business profits on sale of converted asset in the year under consideration tax on capital gains on conversion will be levied in these years according to the area sold by the assessee in each year. In view of the foregoing discussion, we allow the ground of the Department for all the three years. In the above said case, the Mumbai Bench of this Tribunal has elaborately discussed the identical issue and held that the legislature in its wisdom considering the fact that on conversion of capital asset into stock-in-trade only the notional income has arisen, postponed the tax liability therein till the real income was earned of that asset and further held that the tax liability on the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable on the date of taxable event, i.e. sale of converted assets. Circular No. 397, dt. 16th Oct., 1984 also clarifies that the capital gain in cases of converted assets in closing stock would be chargeable in the year when such converted asset is actually sold as stock-in-trade. In other words, not in the year of conversion but year of actual sale. The assessee was therefore liable to the capital gains tax notwithstanding that the conversion of the capital asset into stock-in-trade took place prior to 1st April, 1985. 15. In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not: at the time when the development agreement was entered into. Moreover, in the development agreement, the assessee has not agreed for sale of the entire constructed property on the land, the assessee has agreed only for a portion of the constructed property for sale for the purpose of recovery of the cost of construction and margin of the developer. The assessee has executed all the sale deeds for transfer of the constructed apartments in favour of the end-user/purchaser, therefore the transfer of the propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had adopted the fair market value as on 1st April, 1981 @ ₹ 40,000 per cent. The AO made a reference to the Sub- Registrar on which the Sub-Registrar confirmed the rate in respect of the part of the property at ₹ 14,000 per cent as on 1st April, 1981. The AO made the estimation by taking into account that the guideline value of ₹ 14,000 per cent is in respect of the property consisting of the bungalow and accordingly the AO adopted the fair market value at ₹ 10,000 per cent. We note that in the assessee's property also there was a building which was to be demolished for a fresh construction and if we go by the guideline value which consists of land and building, then the rate adopted by the assessee is very much reasonable and identical to the guideline value. This is not a case that the assessee has transferred the building separately but the building was to be demolished for development of the property. The AO has adopted the fair market value without any verification or taking into consideration the incidence of sale, etc. Since the estimation made by the AO is without any-basis or supporting material, then the substitution of the fair market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted the sale value at ₹ 2,200 per sq. ft. On appeal, the CIT(A) confirmed the rate adopted by the AO. 22. Before us, the learned Authorized Representative has submitted that the sale value adopted by the assessee is based on the sale document i.e. sale deed. All the properties were sold through the registered sale deed and the actual sale consideration received by the assessee varies from flat to flat and the average of the rate is ₹ 2,079 per sq. ft. He has further contended that when the AO has not disputed the sale consideration mentioned in the sale deed and there is nothing brought against the assessee to show that the on-money was received by the assessee, then the estimation made by the AO on the basis of the report of M/s Britto, Ilango Associates is not justified because in the market the actual rate may vary from the estimated rates even estimated by the experts. On the other hand, the learned Departmental Representative has submitted that the AO has estimated the rate of sale value on the basis of the certificate of the experts and therefore adoption of the sale value by the AO is just and proper. He has relied upon the orders of the lower authorities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held company and not transferred through stock exchange, therefore no evidence could be available except the transactions between the parties and books of account. The assessee has acquired the shares on different occasions at different rates. The rate of acquisition has been recorded in the books of account by the assessee. The assessee has claimed the capital loss which resulted because of indexation of the cost of acquisition. When the books of account of the assessee were not rejected by the Department and the entries of acquisition of the shares appeared in the books of account for' a long time, then the claim otherwise allowable cannot be disallowed on the ground that the assessee has not produced the external evidence in support of the acquisition cost. It is an admitted fact that when the shares belong to a closely held company and the transactions of sale and purchase are out of stock exchange, then there could not be any either evidence except the transaction recorded in the books of account between the parties. In view of the above discussion, we hold that the rejection of the assessee's claim of the cost of acquisition is not justified. Accordingly, we set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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