TMI Blog2019 (4) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... red only in the year in which the assessee has executed the sale deed transferring the stock-in-trade and not when the assessee has given stock-in-trade for joint development to the builder. As already held in the above cases, the provisions of section 2(47)(v) would apply only to the capital asset and not to stock-in-trade. We find that the stock-in-trade cannot be considered as transferred in the relevant financial year and therefore, the assessment order cannot be considered to be prejudicial to the interest of the Revenue. Therefore, since of the twin conditions for initiating and also passing of an order u/s 263 is not satisfied and the first ground on which the assessment order has been revised is not sustainable, the CIT order u/s 263 has to be set aside on this ground alone. SCN related to taxability of unsold flats - assessee has received 24 flats from M/s. D.M. Builders and 2 flats were left unsold - amendment introduced by the Finance Act, 2017 w.e.f. 1/4/2018 regarding taxability of notional rent on the two unsold flats - HELD THAT:- When the assessment order was passed on 31.03.2016 when the relevant provision has not even been brought into statute book. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act. Therefore, he was of the opinion that the assessee ought to have offered the short term capital gain to tax on conversion of capital asset to stock-in-trade in the relevant A.Y and further that since the assessee s share value from the JDA has also accrued on account of transfer of 61% of land to the developer, the same should also be brought to tax in the A.Y 2013-14. He also observed that the assessee is in possession of vacant flats received vide the JDA dated 19.08.2011 with M/s. D.M. Builders, which was held as stock-in-trade as on 31.03.2013, but that the assessee has not offered the income from house property from these flats. Therefore, according to the Pr. CIT, the order passed u/s 143(3), dated 31.03.2016 is erroneous in so far as the above issue is concerned and it is also prejudicial to the interest of the Revenue. He, therefore, issued a show-cause notice to the assessee and in reply to the same, the assessee filed its objections as under: i) That the assessee, along with his brother, has purchased 24,960 sft of converted land and thereafter, entered into a registered joint development agreement vide document No.779/2012-13 dated 16.05.2012 with M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term capital gain, he held that the difference between the fair market value of 61% of the share of the land on the date of conversion and the cost of acquisition of 61% of the land is short term capital gain. ii) The assessee is following mercantile system of accounting and therefore, the business income on account of JDA had also arisen during the A.Y 2013-14. He observed that the difference between 39% of the total cost of construction of the project to the Developer based on the project report prepared by the Developer or Registered Engineers Evaluation Report and the fair market value of the 65% of the land on the date of conversion from capital asset to stock in trade, is assessee s business income for the A.Y 2013-14. He, therefore, directed the AO to assess the assessee s share of business income to tax in the A.Y 2013-14. 5. As far as the third issue is concerned, he observed that the provisions of section 23(5) are explanatory in nature and as such for the A.Y 2013-14, the income from house property on vacant flats is chargeable to tax. He accordingly directed the AO to bring it to tax. 6. Aggrieved by the order of the CIT u/s 263 of the Act. the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from M/s. D.M. Builders is chargeable to tax in the A.Y 2013-14 without appreciating the fact that the new provision of section 23(5) was applicable for the A.Y 2018- 19 onwards and the provision was said to be explanatory in nature. 9. The Appellant craves leave to add, alter, amend and delete any of the grounds at the time of hearing. For these and other grounds that may be urged at the time of hearing, the Appellant respectfully prays that your Hon'ble Authority be pleased to pass orders cancelling the Order dtd: 20-03-2018 passed u/s. 263 of the Act and further be pleased to pass such other orders granting such other relief that your Hon'ble Authority may deem fit in the interest of justice and equity . 7. The learned Counsel for the assessee as well as the Revenue have filed written submissions and have also argued in detail. For the sake of ready reference, the written submissions of the assessee are reproduced as under: 1. The Appellant is an individual engaged in the business of Development of Properties and he has filed his return of income on 19-03-2014 for the A.Y 2013-14, declaring income of ₹ 1,50,16,090/- consisting of income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant to show cause as to why the Assessment Order dtd: 31-03-2016 should not be set aside as it was held to be erroneous and prejudicial to the interest of Revenue on the following grounds:- . i. The Short Term Capital Gains arising out of the deemed transfer of 61 % of the Land in favour of the Developers M/s. Sai Builders in the Scheme of JDA dtd: 16-05-2012 relating to the land situated at Sy. No. 16, Ananthapura Village, Yellahanka Hobli, amounting to ₹ 2,27,462/- was found to be erroneous as per the provisions of section 45(2) of the Act. ii. The Business Income arising/acquiring in the hands of the Assessee and his brother u/s. 2(47)(v) of the Act r.w.s 53A of the TP Act on account of JDA should have been worked out based on the 29% of the Total Cost of Construction of the project for the Developer/Builder as per the project report prepared by the .Developer/Builder or as per the Registered Engineer's Valuation Report for the Project as 39% of the Super Built-up area, Car Parking Area acquiring to the share of the Assessee and his brother on the date of JDA . iii. The Assessee was in possession of vacant Flats received vide .JDA dtd:19-08-2011 entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence the Chargeability of L TCG u/.s. 45(2) of the Act is not at all applicable for the A.Y 2013-14 and the same is applicable for the A.Y 2016-17. Therefore this issue cannot be considered as a ground for setting aside the Original Assessment u/s. 263 as proposed in the Show cause Notice dtd: 10-01-2018. 5. Business Income:- The Assessee submits that in the show cause notice it was proposed that the Business income is computable u/s. 2(47)(v) of IT Act r.w.s 53A of TP Act which is applicable only for transfer of Capital Asset and not to the Stock in trade. The 390/0 of the Super Built up area in the case of M/s. Sai Builders has not been received in the A.Y 2013-14. However a right to receive accrued and the income would arise c'1ly at the time of exercising such right. What the Assessee has '5ceived or likely to receive will fructify and would be realized only when the right is exercised either in part or full. Such a stage of exercising the right was not materialized for the A.Y 2013-14 and therefore there cannot be any business income taxable for the relevant A.Y 2013-14. The Assessee further submits that unlike in a case of capital Gain which arises on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore the 263 proposal on this ground is uncalled for. 10. Under these facts and circumstances it is submitted that the original Assessment Order was neither erroneous nor prejudicial to the interest of revenue and therefore invoking the provision of section 263 of the Act is uncalled for in the eye of law. 9.The Ld. Pr. CIT has not appreciated the submissions made by the Appellant and ultimately passed an order u/s. 263 of the Act dated 20-03-2018 and set aside the Assessment Order dtd: 31-03-2016 holding that the said Assessment Order was erroneous and prejudicial to the interest of revenue for the reasons stated in para 5 of the Order u/s 263 of the Act, placing reliance on various judicial decisions mentioned in clause (a) to (p) on page 3 and 4 of the Impugned Order passed u/s. 263 of the Act. 10. Appellant submits that the facts of the Judicial Decisions relied upon by the Pr. CIT are distinguishable and majority of the cases, the decision was rendered based on the facts of each case and the said facts are neither similar nor identical and therefore the said decisions are not applicable to the facts of the Appellant's case. 11. The Appellant submits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se profits, these profits cannot be brought to tax at this stage. That is what the legal position, for the detailed reasons set out above, is. 20. In our considered view, therefore, the authorities below indeed erred in bringing to tax the anticipated business profits on assessee's entering into a development agreement with Menorah Realties Pvt Ltd in respect of the land held by the assessee as stock in trade. The impugned addition of Rs ₹ 17,28,81,276 is thus deleted. 15. The Appellant begs to place reliance on the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), wherein it has been held that the CIT cannot exercise jurisdiction u/s. 263 of the Act until and unless the assessment sought to be revised is erroneous and prejudicial to the interest of revenue and both the conditions should co-exist together and if any of the conditions is absent, then the Provisions of section 263 are not applicable. 16. The Appellant submits that the Ld. PCIT has exercised the Jurisdiction without the authority of law. He has held that the Capital gains arising on account of transfer of Stockin- trade is charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision applicable w.e.f 01-04-2018. On this count also the order passed u/s. 263 of the Act was not justifiable. 19. Without prejudice to the above submissions the Appellant submits that he has offered the Business Income arising out of the transfer of Stock-in-trade on sale of flats in the A.Y 2016-17' and therefore in the guise of implementation of Order u/s. 263, the same -income cannot be subjected to tax twice for the A.Y 2013-14 and also ~. v 2016-17 which is opposed to the principles of Taxation. In this regard the Appellant begs to place reliance on the decision of the Hon'ble Madhya Pradesh High Court in the case of Smt Daya Bai vs. CIT 154 ITR 248 (MP). Under these facts and circumstances the Appellant respectfully prays that your Hon'ble Authority be pleased to pass orders cancelling the Order u/s. 263 of the Act dtd: 20- 03-2018 passed by the Ld. PCIT, Kurnool in the interest of equity and justice . 8. The written submissions of the learned DR are as under: 1. Assessee along with his brother Shri Sitaram Babu purchased 24960 Sq. Feet of land and in Survey no. 16, Anantapura Village, Bangalore dated 07.09.2011. This land was held as C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year the asset is sold on credit. As per provisions of Act, the AO cannot change the system of accounting consistently followed by Assessee. As per the Audit report the Assessee is following mercantile system of accounting. Hence as per accounting standards and as per sale of goods act (which is applicable to Assessee as Assessee has sold stock in trade) the income from sale of goods is to be recognized in the year when the significant 'risk and reward' pertaining to the stock is transferred. 8. The next question that arises in this case is when is the risks and reward in respect of 61 % of stock transferred, was it in A.Y. 2013-14 or was it in A.Y. 2016-17. As per the JDA dated 16.05.2012 para 13 which is reproduced as under. 'The Owners shall on the execution of this Agreement and registration of Joint Development Agreement and payment mentioned in Clauses below grant a specific Power of Attorney in favour of the Promoter or its nominees, empowering to proceed with obtaining of Licences, Plans, consents and in regard to the Building/ s to be constructed on the Schedule Property and authorizing the Promoter to represent before all and any of the Statutory Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requested to uphold the order U/s 263 passed by the Pr. CIT, Kurnool vide order dated 20.03.2018. Long term capital gain 13. It is only reference to this property long-term capital gain calculated by the Assessing Officer on this issue. Since, this property has already converted into stock in trade, it was taken as a business income. However, no business income was calculated for the stock in the case of Anantapura property. Short term capital gain 14. The assessee has purchased converted land on 7.9.2011 and the said land was held as capital asset as on 31.3.2012. Later on, the assessee has converted the same as stock in trade in the books of accounts in the financial year 2012-13. 14.1 On verification of the computation of income, the assessee has not offered any short term capital gain on this land. 14.2 The assessee's share of short term capital gain arising out of the conversion of land from the capital asset to stock in trade should be brought to tax under the provisions of sec. 45(2) of the Act. 14.3 Further, the assessee's share of business income accruing on account of 39% of the super built up area, car parking receivable in lieu of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the admitted income, the entire payment is kept in abeyance as protective assessment . This observation of the AO is relied upon by the learned Counsel for the assessee to submit that the assessment was a protective assessment. He placed reliance upon various case law to submit that the protective assessment without a corresponding substantive assessment is not sustainable. We are, however, not inclined to accept or adjudicate this contention of the assessee at this stage for the simple reason that the said question is pending adjudication before the CIT(A) and if it is held to be not sustainable, then the order u/s 263 also would not be sustainable as the very basis would have been knocked down. Therefore, it cannot be said that the assessment itself is a protective assessment. Therefore, the first objection of the assessee is not adjudicated at this stage. 11. The next question for determination is, whether the assessment order u/s 143(3) of the Act can be said to be erroneous. The three grounds on which the order has been held to be erroneous by the CIT are being dealt with as under: a) According to the CIT, the capital gain has arisen in the relevant A.Y because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in consonance with the legal provisions on the issue. Accordingly, the grounds of the Revenue are dismissed . 12. Further, the Coordinate Bench at Bangalore in the case of Dheeraj Amin vs. ACIT in ITA No.1709/Bang/2013 at Para 19 has held as under: What the assessee has got today is only a right to sell the 1,28,940.26 fts of constructed area in the Alexandria project and the profits, howsoever certain they may appear to be, will only fructify and be realized, and can even be quantified, only when this right is exercised in part or in full. That stage has not yet come, and until that stage comes, in our considered view, such profit cannot be taxed. Unlike in a case of a capital gain which arises on parting the capital asset at the first stage itself, it is a case of business transaction which is completed when the rights so acquired by the assessee are exercised; none can make profits by dealing with himself, as is the settled legal position in the light of the settled legal position in the case of Sri Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC). It is for this reason that we are unable to uphold the action of the authorities below on the facts of this case. No ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to (vi) of Sec. 2(47). However, when it comes to levying of capital gains under sub-sec.(2) of Sec. 45, it deals with capital asset converted by the owner thereof into, or is treated by him as stock-in- trade of a business carried on by him as contemplated under Sec. 2(47)(iv). Once such capital asset which is converted as stock-in-trade is sold, it is also subjected to capital gains, but the said capital gains is chargeable to income tax in the previous year in which such stockin- trade is sold. The word used is sold, not transferred. However, if the stock-in-trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire section and the express words used in sub-section (2) of Sec. 45, the case of considering stock-in-trade otherwise transferred, would arise only if stock-in-trade is not sold. If stock-in-trade is sold, the question of considering whether the stock-in-trade is otherwise transferred would not arise for consideration. The object of using the words 'otherwise transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of sub- clause (vi) of Sec. 2(47) in these following words : pg. 129 the newly inserted sub-clause (6) of Sec.2(47) has brought into the ambit of transfer, the practice of enjoyment of property rights though words commonly known as power of attorney arrangement. The practice in such cases is adopted normally where transfer of ownership is not legally permitted. A person holding the power of attorney is authorized the power of owner, including that of making construction. The legal ownership in such case continues to be with the transferor. Therefore, with that object and in respect of such persons, clause (vi) was inserted which reads as under : 2(47)(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company of other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. 140. Therefore, any transaction which has the effect of transferring or enabling the enjoyment of any immovable property is deemed to be a transfer under Sec.2(47). The Apex Court in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a power of attorney after entering into an agreement of sale for the purposes mentioned therein. It is in pursuance of the power so conferred, coupled with the terms of the agreement of sale, the power of attorney holder has to develop the property, identify the purchasers and sell the undivided share of land as well as the built area to such purchasers. Neither in the agreement of sale nor in the power of attorney, possession of the property was given to him. Having regard to the terms of the power of attorney, the intention of the assessee was not a transfer of the right in a schedule property in favour of his agent nor was he permitted to enjoy the immovable property. Therefore the case would not fall under Sec. 2(47)(vi). The assessee though executed a power of attorney, received the entire consideration under the agreement and acknowledged the same in the books of account and showed it in the balance sheet, that by itself did not confer the power of transferring the stock-in-trade in favour of the power of attorney holder or in favour of the purchasers unless he has executed the sale deed on behalf of the purchasers. Therefore, in view of sec. 45(2) of the Act, the capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to make necessary inquiries and it was held that the CIT was well within his jurisdiction in passing order u/s 263 based on record of assessment. Similar view has been expressed in the cases of CIT, Patiala vs. Himachal Pradesh Financial Corpn, reported in (2010) 186 Taxmann 10J (HP), Duggal Co. vs. CIT, reported in (1996) 220 ITR 456 (Del.), CIT vs. South India Shipping Corpn. Ltd reported in (1998) 233 mITR 546 (Mad.), CIT vs. Deepak Kumar Garg; (2008) 299 ITR 435 (MP), CIT vs. Sanil Goyal, reported in (2009) 176 Taxmann 184 (Uttaranchal); CIT vs. Andhra Civil Constructions Ltd (2003) 216 ITR 461 (Madc); etc. In the case before us, even if it is considered that the AO has not made any enquiries and the CIT is justified in holding the assessment order to be erroneous, we find that the stock-in-trade cannot be considered as transferred in the relevant financial year and therefore, the assessment order cannot be considered to be prejudicial to the interest of the Revenue. Therefore, since of the twin conditions for initiating and also passing of an order u/s 263 is not satisfied and the first ground on which the assessment order has been revised is not sustainable, the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
