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TMI Blog2018 (5) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in allowing the income as capital gains to be taxed u/s 45(2) of the Act, though the assessee was not doing any business of Development and Construction. 3. The learned Commissioner of Income-tax (Appeals) erred in failing to appreciate that the assessee did not incur any expenditure for earning receipts during the year and considering the non applicability of section 45(2) of the Act, the direction for deduction of proportionate cost was not correct as the cost of acquisition of land was allowable while calculating the capital gain on sale of land in the A.Y. 2006-07. 4. The assessee in ITA No.1645/PUN/2014 has raised the following grounds of appeal:- On the facts and in the circumstances of the case:- 1. The learned CIT (Appeals) erred in confirming the addition made by the A.O. amounting to Rs. 3,03,95,968/- on the ground that the amount received by the appellant are revenue receipts and not advances as claimed by the appellant. 2. The learned CIT (Appeals), has not justified in confirming the action of the AO and his conclusion that the amount received in the financial year 2008-09 to be taxed as business receipts. 3. The learned CIT (Appeals) erred in no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, only physical possession of the said property was to be handed over to the developer by the vendor at the time of execution of Development Agreement i.e. 24.02.2006. The Development Agreement was duly registered with the Sub-Registrar, Haveli-III and stamp duty of Rs. 2,83,845/- was paid on registration value of property shown at Rs. 2,83,84,500/-. The Assessing Officer was of the view that the transfer of immovable property was complete only when the Conveyance Deed was registered and for the purpose of capital gains, the transfer was treated as complete with the delivery of possession, when the agreement to sell / buy immovable property was entered into. The Assessing Officer thus, observed that capital gain was attracted in assessment year 2006-07 i.e. the year under appeal. Further, in para N of page 6 of the Development Agreement noted the assessee to have agreed to entrust and developer had agreed to develop all the said land for consideration of 18% amount on gross sales, excluding certain charges. During the course of assessment proceedings, the learned Authorized Representative for the assessee furnished the details of payment received from J.K. Developers i.e. in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) which are reproduced at pages 3 to 16 of the appellate order. The said written submissions were forwarded to the Assessing Officer, who in reply, forwarded remand report which is reproduced at pages 18 and 19 of the appellate order along with rejoinder of assessee at pages 19 to 24 of the appellate order. The CIT(A) then took note of the submissions of assessee, wherein the main contention was that the Assessing Officer had failed to appreciate the year of taxability of capital gains and also the Assessing Officer had wrongly considered stamp duty value as on 24.02.2006 as the cost, while computing deduction instead of fair market value of said land. The assessee submitted that the land had been converted into stock-in-trade from capital asset and in this regard, application was submitted before the Collector, Pune for getting the land as non-agricultural land for the purpose of carrying on the development on the said land. The profits and gains from transfer by way of conversion by the owner of capital asset into stock-in-trade of a business carried on by him, was chargeable to income tax, as income of the previous year in which such stock-in-trade was sold or otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on 24.02.2006 within meaning of section 45(2) of the Act as the said land was stock-in-trade on the date of said agreement and further though the assessee had given possession to the developer vide above agreement, provisions of section 2(47) of the Act defining the term 'transfer' cannot be applied as what was handed over to the developer was not capital asset but stock-in-trade. The assessee thus, pointed out that merely because development rights of converted land were given to the developer, that could not be treated as sale or transfer of land which was stock-in-trade of assessee. The assessee concluded by saying that there was no dispute that there was an element of business in the transaction but the dispute was only in respect of year in which business income was to be taxed. The assessee stressed that income from land was to be taxed in the year when the possession of flats constructed by the developer was given to the customers and till the time the amount received from flat purchasers were advances and the same were actually considered as advances. The assessee then challenged the order of Assessing Officer in considering the value adopted by stamp duty aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to income tax, as income of the previous year in which such stock was sold or otherwise transferred as per provisions of section 45(2) of the Act. The CIT(A) thus, held that though levy of capital gains was made obligatory, but section 45(2) of the Act postpones the levy of capital gains till the converted asset is actually sold or otherwise transferred. He held that action of conversion within meaning of the word 'transfer' took place earlier, but the tax had to be levied in the year of its actual sale and not in the year of conversion. Further, fair market value of asset on the date of said conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of transfer of capital asset. So, far as the issue relates to taxability of business receipts received by the assessee, the CIT(A) held that the agreement dated 24.02.2006 entered into by the assessee with J.K. Developers was Development Agreement and the case of sale simplicitor and not Joint Venture Agreement. The CIT(A) then reflected on the role of assessee in the development and whether it was taking any risk and held that the transaction in question was not an adventure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss receipts are to be taxed in the year in which possession is handed over of the constructed flats to the purchaser is not tenable." 9. The CIT(A) further held as under:- "3.5.10 In view of the above fact the Assessing Officer has rightly taxed the appellant during the year under consideration, however, the amount to be taxed during the year will be limited to the business receipts received during the year amounting to Rs. 3,03,95,968/- and the cost to be taken as a deduction will be the proportionate amount of the fair value limited to the extent of area constructed by the developer during the year. It is relevant to point out that the appellant has received business receipts to the extent of Rs. 2,58,37,188/- during F.Y. 2007-08 i.e. A.Y. 2008-09 which will have to be taxed during that year itself for which the Assessing Officer has to initiate necessary action with respect to reopening of the said assessment. The cost of deduction will have to be again limited to the extent of area constructed during that year and the work in progress i.e. the stock-in-trade brought forward in the next A.Y. i.e. 2009-10 will be again reduced to the extent of work carried out or area constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 3 are raised by the assessee. The learned Authorized Representative for the assessee pointed out that grounds of appeal No.4 and 5 are not pressed. 14. The Revenue on the other hand, is in appeal against directions of CIT(A) in holding that only the amount received during the year is to be taxed and also on the ground that quantification of capital gains in assessment year 2006-07 and its taxation in the respective years. 15. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of agreement entered into by the assessee with M/s. J.K.R. Developers. The assessee terms it to be Joint Venture Agreement. However, the terms of agreement if seen, are in respect of development agreement, wherein the assessee has contributed his land for development and the developer has undertaken construction of project and it was agreed that the land owners, of which the assessee is one of the parties would receive the amount out of sale consideration of project. The assessee has no role to play in the development and once it has no role to play, then it cannot be called as Joint Venture Agreement. The issues raised in the cross appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 income tax as his business of previous year in which such stock-in-trade is sold or otherwise transferred by him and for the purpose of section 48 of the Act, fair market value of asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of transfer of capital asset. Interpreting the provisions of the Act, wherein the assessee holds capital asset and converts the same into stock-in-trade, then such conversion is transferred as per section 2(47)(iv) of the Act, such transfer is exigible to capital gains under the provisions of section 45(1) of the Act. However, exception is provided in sub-section (2), wherein it is laid down that the profits and gains which arises on treatment of capital asset as stock-in-trade shall be chargeable to tax in the previous year in which such stock-in-trade is sold or otherwise transferred by him. Further, the mode of computation of capital gains is also provided in sub-section (2) that the fair market value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2011-12 i.e. the year in which flats were fully developed and handed over to the flat buyers. In assessment years 2008-09 and 2009-10, it was only an advance and the same could not be treated as business profits of assessee as there was no concrete right to receive the said amount in assessment years 2007-08 to 2008-09. 19. In order to decide the part of this issue, reference is made to the terms of Development Agreement between the parties. The agreement is Development Agreement, copy of which is placed at pages 9 to 37 of Paper Book. The Preamble of said agreement enlists the sequence of events by which the said land came to be owned by several owners. The owners were desirous of constructing a building on the said land but due to not having proper experience in construction and development of land, entrusted the same for development to M/s. J.K.R. Developers. As per clause 9 of the Preamble, the Party of the Second Part M/s. J.K.R. Developers has agreed to develop the land. It is further provided that after negotiations between the parties, the First Party had agreed to entrust the land and the Second Party had agreed to develop the said land for total consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst Party not requiring to make any contribution towards construction cost and expenses. Clause 9 talks about rights and obligations of Second Party, wherein clause (a), the Second Party shall pay consideration of the said property to the First Party as mentioned in clause (1). Under clause (b), Second Party shall be entitled to sub-divide the said land by obtaining sanction to the layout of the said land. As per clause (c), the Second Party shall be entitled to sell, mortgage or any other manner alienate the constructed or non constructed premises to the prospective buyers, mortgagee, etc. The said clause also provide the authority to mortgage the premises agreed to be purchased to the prospective buyers for the purpose of obtaining housing loan, etc. It was further provided that the First Party shall not be personally liable for repayment of such loan amount or interest thereon. As per clause (d), funds for the construction had to be arranged by the Second Party. Clause 10(a) provided a specific covenant between the parties that the First Party shall at their own cost and risk assure / ensure that the Second Party is entitled and permitted to develop the said property and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts excluding the other charges, is to be collected by the Second Party on the saleable area from prospective purchasers. As per the agreements for sale entered into with them and would be given to the party of First Part after 15 days of each month on the collection amount during the period of 15 days. However, it is also provided in the said agreement itself that in case any part of consideration is not handed over, then the same would be handed over along with interest before execution of any agreement to sell to the prospective buyers or flat or tenement owners. This implies that the amount as and when it is collected by the developer i.e. Second Party has to be handed over in proposition to the assessee but it is the nature of amount received by the assessee, which has to be determined in the present facts of the case. The said amount received by the assessee is an advance receipt because the right to collect the said amount would crystallize on the day when the tenants or portion of land is sold by the developer to the prospective buyers. Undoubtedly, the assessee has received advance amount equivalent to his share in the year under consideration but we cannot lose sight ..... X X X X Extracts X X X X X X X X Extracts X X X X
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