TMI Blog2017 (4) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which is hereby confirmed. Addition on account of trading/business profit - Held that:- CIT(A) has held that it is not correct to hold that the proportion in which the sale proceeds are to be divided between the assessee and the developer should be considered and the land cost to be divided in the same proportion. Accordingly, the action of the AO was held not justified by the ld CIT(A) and it was held that the business profit for the appellant cannot be computed by just allowing 18% of the land cost as its expenses. We agree with the said findings of the ld. CIT(A) that the profit sharing ratio of the sale proceeds should not be a basis to limit the proportion of land cost in the hands of the assessee. It is undisputed fact that the assessee has contributed whole of its land which has subsequently been developed by developer who is responsible for the construction and development of the project including sales thereof. The profits that has to be computed in the hands of the assessee should therefore take into consideration the whole of land cost in hands of the assessee. It is unclear how the sale proceeds have been determined by the assessee and what was the corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 30,26,822/- out of total addition of ₹ 33,26,822/- made by the AO on account of trading profit. 2. In the first ground of appeal for A.Y 2007-08, the Revenue has challenged the action of ld.CIT(A) in deleting the addition of ₹ 14,55,022/- made by the AO on account of capital gain for conversion of capital asset into stock entry . 2.1. The brief facts of the case are that the assessee acquired a piece of land at Mauji Colony, Malviya Nagar, Jaipur in the financial year 1995-96 and thereafter, entered into a Development Agreement on 08.01.2005 with a developer Company named as M/s Finetech Developer Private Limited, Jaipur. As per the Assessing Officer, the land was shown as capital asset in the balance-sheet as on 31st March, 2005 and the land has been converted into stock-in-trade in the subsequent financial year as apparent from the balance sheet as on 31st March 2006. The AO accordingly, applied the DLC rate of ₹ 13,000/- to calculate the Fair Market Value for the purpose of computing capital gains in terms of section 45(2) of the Act. According to the assessee, the conversion of capital asset into stock-in-trade was ratified by Board of Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, the land has to be shown as fixed assets as on 31.3.2005. Considering these facts and circumstances, and there being no contrary evidence brought out on record by the AO., the date of conversion of land into stock in-trade is to be taken as 10.4.2005 considering the Board s resolution dated 9.4.2005, as shown by the appellant. Accordingly, FMV has to be determined as on 10.4.2005 for the purpose of section 45(2). The DLC rate on 10.4.2005 was ₹ 9,000/- per sq.mt, whereas the appellant has taken the FMV @ ₹ 9,200/- per sq.mt, which is slightly more than the DLC rate. Therefore, there is no justification to disturb the FMV of the land so shown by the appellant. Hence, the addition on account of capital gain by taking the FMV as on 31.3.2006 by the AO is hereby deleted in both the years under appeal. 2.3. It is not in dispute that the capital asset has been converted into stock-in-trade by the assessee. The limited issue under dispute relates to the date of actual conversion of capital asset into stock-in-trade. The balance sheet date reflects the position as on the year-end and the said date cannot be taken as date of conversion unless the conversion or trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other expenses. Thus, as far as cost of land is concerned, it is relatable to/borne by the land owner and constructions expenses are concerned, it is borne by developer. Nowhere it is envisaged that the proportion in which in sale proceeds are to be divided, the land cost is also to be divided in the same proportion. Accordingly, action of the A.O is totally unjustified and against the language as well as the spirit of the development agreement. Business profit for the appellant land owner cannot be worked out by just allowing 18% of the land cost as its expenses. Therefore, the basis of addition made by the A.O itself being totally against not only the developer agreement but also against the accounting practices and further against generally accepted practices, the addition made by the A.O cannot be sustained. However, considering the defects pointed out by the A.O that the sale rate shown is quite less than the DLC rate and moreover also the defect that the sharing ratio of the appellant company is very low which is also not very justifiable and considering the application of decision of Hon ble Supreme Court in the McDowell Co. Ltd vs. CTO Ltd 154 ITR 148 and various othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stock-in-trade prevailing on the date when such conversion takes place. In instant case, we find that the AO while computing the business profits has not considered such fair market value on the date of conversion and further, has allowed only 18% of the cost of the land (considered while computing the capital gains u/s 45(2)) in computing the business profit of the assessee company. Regarding substitution of such actual land cost in his hands of the assessee by the full value of consideration as contemplated u/s 45(2) of the Act, there is no finding given by the ld. CIT(A) in this regard and we are unable to comment on the same. The issue therefore needs to be set aside to the file of the ld.CIT(A) to decide the same afresh taking into consideration the decision of the Hon ble Supreme Court in case of Bai Shirinbai K. Kooka. 3.6. Further, from perusal of the records, it is unclear how the sale proceeds have been determined by the assessee and what was the corresponding DLC rate prevailing at that point of time and the reasons for the variance. It is also unclear how the profit sharing ratio of 18:82 has been determined between the assessee and the developer in terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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