TMI Blog2017 (12) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... the land has converted into stock in trade and the Ld. CIT(A) has not adduced any evidence to prove for re-convergence of flats into stock in trade for capital assets, hence no enhancement is possible. The assessee as per the development agreement got some flats from the developer and rented (let out) them to earn the rental income and the same rental income is being offered by the assessee for taxation. Since the assessee offered the rental income for taxation, therefore, the Assessing Officer cannot bring the said land into the ambit of taxation by applying the provision of section 45(2) of the Act. Applicability of the provisions of Section 28(iv) in respect of the flats retained by the assessee in subsequent Assessment Years - Held that:- Since we have already adjudicated the solitary grievance of the assessee, stating that provisions of section 45(2) of the Act does not apply to the assessee, hence this ground becomes infructuous and does not require adjudication. - I.T.A. Nos. 1925 to 1929/Kol/2014 - - - Dated:- 20-12-2017 - Shri Aby. T. Varkey, JM And Dr.A.L. Saini, AM For The Assessee : Shri Sanjay Bhabttyacharya, AR For The Revenue : Shri Goulen Hangsing, C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the developer. 6. That the assessee craves leave to add, alter or withdraw anyground or grounds of appeal before or at the hearing of the appeal. 4. Although, in this appeal the assessee has raised a multiple grounds of appeals, but at the time of hearing, the solitary grievance of the assessee has been confined to the issue that there is no conversion of land into stock in trade by applying the provisions of section 45(2) of the Income Tax Act. Ground No. 4 raised by the assessee relating to provisions of Section 28(iv) of the I. T. Act and ground No. 5 relates to enhancement by the CIT(A), all these grounds are inter-related, therefore we take them together. 5. The brief facts qua the issue are that an assessment u/s 143(3) had been made on 27. 11. 2008 at a total income of ₹ 1,23,75,408/- which had comprised income from House Property of ₹ 13,52,923/-, Business Loss of ₹ 4,04,195/- and Long Term Capital Gains of ₹ 1,14,26,980/- (after deduction of ₹ 4,50,00,000 for capital Gains Bonds purchased). Subsequently, the CIT, Kolkata-II, vide her order u/s 263 of the Act, dated 14. 12. 2010, set aside the said assessment. The CIT in her or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the assessee towards the sale price of the transferred land were being paid by way of sale proceeds of every alternate flats that were sold by the above-mentioned company. The assessee did not have anything to say as regards the selection of buyers or flats or the prices to be paid by the buyers for the flats, and all these issues were to be decided by the above-mentioned company absolutely in its own discretion. The Assessing Officer stated in his order that the assessee had got selling/ownership right on the 50% of the built up area and as per the assessee the said statement of the Assessing Officer was not correct. The assessee submitted before the AO that he never got selling/ownership right, but was being paid the sale price of the land on the basis of the alternate sales affected by the above company as per the agreement. The Assessing Officer held that the assessee had converted the land into stock-in-trade. On the basis of the above observation the Assessing Officer held that in the assessee s case, the provisions of section 45(2) of the Income-tax Act, 1961 would be applicable and incomes would be assessable both as Capital Gains and Business Income. The Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into stock in trade should also be charged in the year in which corresponding sale takes place. Therefore, capital gain chargeable to tax in a year shall be that proportion of total capital gain on conversion of total land into stock in trade, which is the proportion of total undivided share in land of the flats sold during the year as ratio of total land. The sale consideration received during the year over and above the proportionate fair market value of such undivided share in land would be chargeable as business income. It may also be mentioned that the assessee has not sold all the flats constructed by the developer. It is informed, that out of the flats allotted to the assessee in Dayton Heights Project, 33 flats were retained for earning rental income. Theassessee has stated that it has offered cost of construction of these flats as capital gain in the A. Y. 2011-12. It has been argued by the assessee that if provisions of section 45(2) are applied no amount in respect of these flats can be brought to tax as no sale had taken place. In this regard, it is to be firstly mentioned, that this point does not relate to the year under the present appeal. However, since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ras, the objections made by the assessee to the proposed enhancement are rejected. As stated earlier, as per the working given by the assessee, long term capital gain for the year and business income as per the aforesaid methodology would come to ₹ 3,71,61,417/- and ₹ 1,92,65,263/- respectively. The Assessing Officer is directed to verify the working with reference to the area and sale price of the flats sold and proportionate cost of land etc. in line with the discussion in the preceding paragraphs. The mistake of ₹ 70,73,921/- (for the entire land) mentioned by the assessee in his reply to the show cause letter for enhancement shall also get corrected in the process of verification. Capital gain and business income is to be assessed accordingly, subject to such verification. 7. Therefore, the ld CIT(A) held that the land is being sold not at a time but its undivided shares are being sold as and when the respective flats are being sold. The provision of section 45(2) stipulates that capital gain on conversion of the land into stock in trade should also be charged in the year in which corresponding sale takes place. Therefore, capital gain chargeable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloper of ₹ 28,59,900/- from the gross sale proceeds of flats of ₹ 5,96,56,580/- whereby the long term capital gain came to ₹ 5,64,26,680/-. The assessee invested in the prescribed bonds and claimed deduction of ₹ 4,50,00,000/- u/s 54EC of the Act. 8. 1 The ld Counsel submitted that the Assessing Officer in his Assessment Order passed u/s 143(3)/254, assumed an alleged conversion of land to stock in trade by the assessee and applied section 45(2) of the Income Tax Act, 1961 and he assumed sale of the entire land. As a result,the Assessing Officer computed the long term capital gain at ₹ 4,31,47,708/- (before deduction u/s 54EC) and he also determined the alleged Business income at ₹ 62,05,051/-. Hence against the assessee s offer of long term capital gain of ₹ 5,64,26,680/-, the Assessing Officer arrived at a figure of ₹ 4,93,52,759/- comprising of long term capital gain of ₹ 4,31,47,708/- and the business income of ₹ 62,05,051/-. The assessee objected against the Assessing Officer s action of application of section 45(2) by stating the following reasons: i. The assessee s land had been a Capital Asset in its hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset, converted the capital asset into stock in trade or has treated such capital asset as stock in trade of a business. There is no such material in this regard on record. The Assessing Authority while initiating the proceeding under section 148, read with section 147, has inferred such conversion of capital asset into the stock in trade and applied the provision of section 45(2) which is wholly erroneous. On the basis of the above facts and the decision of the Hon ble Allahabad High Court, the counsel for the assessee submitted that since there had not occurred any conversion of the assessee s land into stock in trade, there could not be any application of section 45(2) and therefore the assessee s computation of long term capital gains in its return should have been accepted by the Assessing Officer while making the assessment. The counsel for the assessee further submitted that the Ld. CIT(A) failed to appreciate that without there being a positive act on the part of the assessee to convert its capital asset viz. , the land into stock in trade, the application of section 45(2) by the Assessing Officer had been unjustified andhence, there should not be any application of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to income tax . In the assessee`s case under consideration, neither the assessee has converted the land (capital asset) into the stock-in-trade nor, at any point of time, treated the capital asset as stock-in-trade. It cannot be inferred as stock-intrade. There should be a positive act on the part of the owner of the asset. Since in the present case the assessee (owner of the land) has neither converted the capital asset as stock-in-trade nor treated such capital asset as stock-in-trade, the provision of Section 45(2) of the Act, is not applicable. There is nothing on record to show that the assessee has converted or treated such land as stock-in-trade. We note that in this case, the assessment under section 143(3) was completed by Assessing Officer on 27. 11. 2008 at a total income of ₹ 1,23,75,408/-, which had comprised income from house property of ₹ 13,52,923/-, business income of ₹ 4,04,195/- and long term capital gains of ₹ 1,14,26,980/- (after deduction of ₹ 4,50,00,000/- for capital gain bonds purchase). We note that the assessee was getting rental income from the flats which he acquired from the Developer as per the Development Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lats), capital gains and income from other sources. In assessment year 2011-12, the assessee sold some flats and offered capital gain in the year of sale. Based on the above discussion it can be safely concluded that the assessee has not converted the land into stock in trade and the department has not adduced any evidence to prove that the land has converted into stock in trade and the Ld. CIT(A) has not adduced any evidence to prove for re-convergence offlats into stock in trade for capital assets, hence no enhancement is possible. The assessee as per the development agreement got some flats from the developer and rented (let out) them to earn the rental income and the same rental income is being offered by the assessee for taxation. Since the assessee offered the rental income for taxation, therefore, the Assessing Officer cannot bring the said land into the ambit of taxation by applying the provision of section 45(2) of the Act. 11. In the result, ground Nos. 1. 2 and 3 raised by the assessee, are allowed. 12. Ground No. 4 raised by the assessee relates to applicability of the provisions of Section 28(iv) of the Act, in respect of the flats retained by the assessee in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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