TMI Blog2018 (4) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... rsion has happened by assessee’s own admission during financial year 2009 and the intent of the assessee has thus been demonstrated through his own actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head “capital gain” in the year(s) the stock-in-trade is sold/transferred. Sales realization of the stock-in-trade over such fair market value is required to be assessed as “business income”. During the year under consideration, it is an admitted position that 15 plots have been sold for a consideration of ₹ 54,93,100. Therefore, the taxability arising on conversion of agricultural land into stock-in-trade to the extent it has been sold during the year, arises during the impunged assessment year. The matter is accordingly set-aside to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots. - ITA. No. 209/JP/2017 - - - Dated:- 27-2-2018 - SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SINGH YADAV, AM For The Assessee : Shri P.C. Parwal (CA) For The Revenue : Smt. Neena Jeph (Addl. CIT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocument issued by Tehsildar dt. 26.06.1975. From the same and the family pedigree, it can be noted that Sh. Hardayal has two sons, i.e. Sh. Jhabbu and Sh. Gurbax. Therefore, the land was recorded in Khasra Girdawari in the name of Sh. Jhabbu, share and Sh. Gurbax, share. Sh. Gurbax has two sons, namely Sh. Gangadeen and Sh. Matadeen whereas Sh. Jhabbu has no successor and therefore, he adopted Sh. Matadeen. Therefore, after the death of Sh. Gurbax and Sh. Jhabbu, in Khasra Girdawari, share in the land was recorded in the name of Sh. Matadeen and share in the name of Sh. Gangadeen. Sh. Gangadeen has two sons, namely Sh. Kalya and Sh. Mahaveer whereas Sh. Matadeen has only one daughter. Therefore, after the death of Sh. Gangadeen, in the revenue record, share in the land was recorded in the name of Matadeen and share in the name of Sh. Mahaveer Sh. Kalya. Sh. Matadeen has no son, he relinquished his share in the name of Sh. Kalya. Accordingly, Sh. Kalya has share in the land whereas Sh. Mahaveer has share in the land. In the revenue records, the land is always mutated in the individual name, therefore, there is no mention of HUF in these records but from the fact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is-a-vis his own son; that would amount to creating two classes among the heirs mentioned in Class I, the male heirs in whose hands it will be joint Hindu family property vis-a-vis their sons, and the female heirs with respect to whom no such concept could be applied or contemplated. The Supreme Court, therefore, held that the property which devolved on the son under section 8 would be his absolute property and would not be joint Hindu family property vis-a-vis his own son. 7. This judgment of the Hon ble Supreme Court has been followed in the subsequent judgement in the case of the CIT v. EL. Karuppan Chettiar [1992] 197 ITR 646 (SC). In this case, the Supreme Court considered the case of the deceased who, with his wife, sons and daughter constituted a HUF at the time of his death. His heirs including his son succeeded to the properties left by the deceased under section 8. The question was whether the income from the property coming to the son on the death of the deceased should be assessed as the income of the joint family of the son. The Supreme Court held that the income from the property which was inherited by the son on his father's death was not assessable as inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 8 to inherit, the latter would by applying the old Hindu law get a right by birth of the said property contrary to the scheme outlined in section 8. Furthermore, as noted by the Andhra Pradesh High Court, the Act makes it clear by section 4 that one should look to the Act in case of doubt and not to the pre-existing Hindu law. It would be difficult to hold today that the property which devolved on a Hindu under section 8 of the Hindu Succession Act would be HUF property in his hands vis-a-vis his own son; that would amount to creating two classes among the heirs mentioned in Class I, the male heirs in whose hands it will be joint Hindu family property and vis-a-vis their sons and female heirs with respect to whom no such concept could be applied or contemplated. It may be mentioned that heirs in Class I of Schedule under section 8 of the Act included widow, mother, daughter of pre-deceased son, etc. (p. 1760) 6. It can, therefore, be said that the view taken by the Tribunal is not correct. We, therefore, answer the question referred to us as under: on the facts and in the circumstances of the case the Tribunal was not justified in holding that the separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he residential plots is in the nature of business income for the reason that the land has been sold after plotting which has resulted in change in the nature and character of agriculture land to residential. It has further been held by the AO that by such plotting of land, the agriculture land has been converted into stock-in-trade of assessee s business. In this regard, it has been held by the AO that after getting the maps prepared and laying down the road, the plotting has been done and the plots have been sold during the previous year and in the year under consideration. The said fact is confirmed from the information received from the Tehsildar and also the report of the Inspector who has carried out the physical inspection of the site and whose findings are contained at para 12 of the assessment order which is reproduced as under:- 12. The Assessing Officer also referred to the decisions of Hon ble Supreme Court in case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 (SC) and the Hon ble Madhya Pradesh High Court in case of CIT vs. Suresh Chand Goyal (2007) 16 (1) ITCL 33 and CIT vs. Jawahar Development Association (1981) 127 ITR 431 (MP). Accordingly, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o residential plots and selling them as business venture and taxed the receipts as business income. I have taken note of the inspector s report that the land was developed by the appellant by developing access road within the residential colony so developed by the appellant. The Inspector s report has also indicated that a proper school and a hospital are also running on the developed land. More than 40 residences have already been built by the purchasers on the land. All these facts have indicated that the nature of agricultural land had undergone irreversible change. It is no longer agricultural land but has been developed as a residential colony. 8.3.3 Now, the moot question in the present grounds of appeal is whether the sale of plots comes under the purview of adventure in the nature of trade or not. In this regard, the appellant had cited a large number of judicial pronouncements in favour of its claim. I have gone into the plethora of judgments cited by the appellant. However the gist of most of the cited judgments hinge broadly on the parameters set by the Hon ble Supreme Court in the case of G. Venkataswamy Naidu vs. CIT (1959) 35 ITR 594 (SC). Therefore it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents as mentioned above, I have no doubt whatsoever, that the motive, intention and realization of the entire scheme of thing adopted by the appellant was to maximize the value of the asset and using it for business purposes. In that pursuit the appellant had constantly tried and execute different methods at different time exploiting the resources and maximize the profit out of it. It is a continuous process right from the inheritance of land and till the eventual sale of such residential plots. The registering and stamp duty authorities have also recognized plots. The registering and stamp duty authorities have also recognized the plotting as residential plots which is very much evident from the registered sale deeds and the stamp duty paid on such transfer of residential plots. In this regard, I have also noted the above mentioned Apex Court Judgment where it has said that just as the conduct of the purchaser subsequent to the purchase of a commodity improving or converting it so as to make it more readily resalable is a relevant factor in determining the character of the transaction, so would is conduct prior to purchase be relevant if it shows a design and purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, Tehsil Kotkasim, District Alwar. The Inspector in his report has submitted that the agricultural is 12 kms away from the municipal limits of Kotkasim Tehsil and 15 kms of Bhiwadi. This is also evident from the letter dated 19.03.2015 u/s 133(6) by the Tehsildar of Kotkasim, Alwar submitted to the AO. Section 2(14) clause (iii) states that an agricultural land which is situated beyond 8 kms of the municipal limit is not to be considered as a capital asset. Therefore, as the agricultural land under consideration is situated beyond 8 kms of the municipal limit, it is not a capital asset u/s 2(14)(iii) and consequently any gain on sale of this land is not liable for tax. 2. The jamabandi is at PB 21-27. The land was used for agricultural purposes as is evident from the Khasra Girdawari at PB 28. For better realisation of his ancestral land, he sold the same after dividing it into 34 plots. A total of 31 plots were sold by him in FY 2009-10, 2010-11 and 2011-12 whereas 3 plots were kept for his own use. During the year under consideration, he sold 15 plots amounting to ₹ 54,93,100/-. Therefore, the Ld. CIT(A) has correctly held that income is to be computed with referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Without prejudice to above, even if it is held that assessee has converted the agricultural land of HUF as stock in trade, its taxability would be governed by section 45(2). As per this section, profits gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock in trade of business carried on by him, shall be chargeable to tax as income of the previous year in which such stock in trade is sold and for the purpose of section 48, the FMV of the asset on the date of such conversion shall be deemed to be full value of consideration received as a result of the transfer of capital asset. Therefore, FMV of the asset on the date of conversion as reduced by the indexed cost of acquisition is required to be assessed under the head capital gain and excess over such FMV is required to be assessed as business income. The Ld. CIT(A) has not considered the provision of this section and also not allowed the deduction on account of indexed cost of acquisition and therefore, the entire income assessed by him as business income is not as per law. In view of above, the income assessed by Ld. CIT(A) as business income be directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cestral agricultural land after plotting it out in order to secure better price, is not an adventure in the nature of trade or business. It was submitted that there is nothing on record to show that the land when acquired was with an intention to sell it by plotting. Further, reliance was placed on various decisions where it was held that purchase of land once upon a time and thereafter selling the same in piecemeal after development, the profit arising would be taxed under the head Capital gain and cannot be treated as arising out of adventure in the nature of trade and brought to tax under the head profits and gains of business . We have gone through these decisions which have been cited by the ld AR at the Bar and we are of the view that these decisions, rendered in the context of individual facts and circumstances of the case, have either decided a particular transaction as a disposal of capital asset rendering it to be brought to tax under the head capital gains or as adventure in the nature of trade rendering it to be brought to tax as a disposal of stock-in-trade under the head profits and gains from business . 19. At the same time, there are situations where a capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year in which such stock-in-trade is sold or otherwise transferred. Section 45(2) starts with a non obstante clause. Therefore, the provision of section 45(2) supersedes all the other provisions. Under sub-section (2) of section 45, it is clear that capital gain shall be charged in the previous year in which such stock-in-trade, which is known to be so only after conversion, is sold or otherwise transferred. Admittedly, the transfer of stock-in-trade in the present case was effected by way of registered deed of conveyance during the present assessment year. Therefore, the first appellate authority was justified in holding that capital gain was to be computed in the previous year even though that conversion was effected before 1-4-1985. This sub-section supersedes provision of sub-section (1) and provides for charging of capital gain in the year when the converted stock-in-trade is sold or otherwise transferred. For the purpose of section 48 also this section has provided the method for computing capital gain in such circumstances, i.e., the fair market value of the asset on the date of such conversion shall be deemed to be the full value of the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment or capital asset in stock in trade the business must be in existence. If the assessee starts the business by converting the investment into stock in trade instead of purchasing it from the market can it not be called that the assessee is in the business of trading in shares enabling the assessee to avail the benefit of section 45(2) of the Act. To our mind the restrictive meaning as suggested by the revenue should not be given to the words 'business carried on by him' in the light of the use of the words in other sections of the Act like section 28(i). Moreover, in the instant case, the assessee was already in the business of manufacture and sale of furniture and section 45(2) does not state that the investment can only be converted in a stock in trade of the business of trading in shares. The assessee can undertake multiple business activities under his proprietary concern. Besides, the manufacturing and sale of furniture, the assessee can also deal in trading in shares in the name of same proprietary concern keeping the stock in trade of shares separate. From any angle, if the facts of the case are viewed, we would find that the conversion of investment in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which such stock-in-trade is sold or otherwise transferred by him. The property shall be deemed to have been transferred in the year in which it was converted into stock-in-trade. The provision of Section 45 (2) providing for capital gains takes care of the facts, where the assessee does not transfer capital assets into stock-in-trade, but the asset is treated as stock-in-trade. Section 45(2) provides as follows:- 45(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. 27. We do not find that the income tax authorities and the Tribunal committed any error in applying Section 45 (2) of the Act for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land in this case was converted into a stock in trade in the hands of EML and as demerger is not a transfer, the capital gains under that section is charged when the land was sold by the assessee company. The capital gains accruing on conversion of the land in stock in trade can be determined in the hands of EML and the computation cannot be questioned by the department. Levy of tax is postponed at the time of actual transfer or sale. Under Section 45(2) of the Act, the section charges to capital gains conversion of investment, into stock in trade but postpones the charge of tax to the time, such stock in trade is sold or transferred. Once converted into stock in trade, the asset will continue to be treated as stock in trade, as mentioned in the section itself. Application of provisions of Section 45(2) will not reconvert the converted stock in trade back into an investment. Consideration of sale of such converted asset will always be assessed as profits of business. The said provision was interpreted by the Assessing Officer under the said section. 23. Following the decision of this Court, in the case of Ambadi Enterprises Ltd. (supra), wherein it is held as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is now well settled by these decisions that where an assessee converts his capital assets into stock- in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade (since this would be the cost to the business) and not the original cost to the assessee .. 24. Therefore, in the light of the decisions rendered by this court as well as the Hon'ble Supreme Court and the orders passed by the coordinate bench of the Income Tax Appellate Tribunal, in the case of Essorpe Mills Ltd. (supra) wherein the revenue has accepted the sale of 50% of the same property by the Essorpe Holdings Pvt. Ltd., to an extent of 5.075 acres of land for the assessment year 2009-10, directing the Assessing Officer to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value of sale and stock in trade to be considered as business income . 25. Applying the ratio laid down in the above cited decisions, in the instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s own admission during financial year 2009 and the intent of the assessee has thus been demonstrated through his own actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition is required to be assessed under the head capital gain in the year(s) the stock-in-trade is sold/transferred. Further, sales realization of the stock-in-trade over such fair market value is required to be assessed as business income . During the year under consideration, it is an admitted position that 15 plots have been sold for a consideration of ₹ 54,93,100. Therefore, the taxability arising on conversion of agricultural land into stock-in-trade to the extent it has been sold during the year, arises during the impunged assessment year. The matter is accordingly set-aside to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots. The ground no. 2 of the assessee is disposed off with above directions. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 27/02/2018 - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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