TMI Blog2020 (5) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... evant AY. Further, such position has been confirmed by the coordinate bench of Tribunal at Bangalore in the case of Dheeraj Amin Vs. ACIT [ 2014 (6) TMI 1017 - ITAT BANGALORE] the authorities below indeed erred in bringing to tax the anticipated business profits on assessee s entering into a development agreement in respect of the land held by the assessee as stock in trade - Decided against revenue. - ITA No. 1624/Hyd/2016 - - - Dated:- 21-2-2020 - Smt. P. Madhavi Devi, Judicial Member And Shri A. Alankamony, Accountant Member For the Assessee : Shri A.V. Raghuram For the Revenue : Shri Y.V.S.T. Sai ORDER PER SMT. P. MADHAVI DEVI, J.M.: This is an appeal filed by the Revenue against the order of CIT(A) 12, Hyderabad, dated 10/08/2016 for AY 2012-13. 2. Brief facts of the case are that the assessee company engaged in the real estate business, filed its return of income for the AY 2011-12 on 28/09/2011 admitting loss of ₹ 1,44,670/-. There was a search and seizure operation in the case of Ramky Estates Farms Ltd. on 07/02/2013, during the course of which, a Joint Development Agreement (JDA) dated 20/01/2011 entered into by the assessee alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has given right to the developer which directly gives rise to business income. 4. The CIT(A) has erred in ignoring the facts that the assessee is following mercantile system of accounting and received a sum of ₹ 1,22,82,610/- as a security deposit and thereby the assessee is required to offer the business income of ₹ 9,29,92,155/- for the year under consideration. 5. the appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored and 6. The appellant prays that the other ground (s) that may be urged at the time of hearing. 4. The ld. DR supported the order of AO while ld. counsel for the assessee supported the order of CIT(A). 5. Having regard to the rival contentions and material on record, we find that, undisputedly, the land, which is a subject matter of MoU/JDA with Ramky Estates Farms Ltd. is treated as stock-in-trade by the assessee. The AO has observed that the assessee has given the said land for development and has given possession of the same to the builder for the said purpose and, therefore, he held it to be a transfer. We find that as rightly pointed out by the ld. CIT(A), the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as is inescapable in the light of the above position, that the provisions regarding capital gains are not attracted, the definition of transfer under section 2 (47) of the Act, and of Section 53A of the Transfer of Property Act- which is relevant in the Income Tax Act only for the limited purposes of connotations of expression transfer under section 2(47) only, have no bearing on the adjudication about taxability of notional profits in the hands of the assessee. While on this issue, we may also mention that learned Departmental Representative s reliance judgment of Hon ble jurisdictional High Court in the case of Dr T K Dayalu (supra), as also on Hon ble Bombay High Court s judgment in the case of Chaturbhuj Kapadia (supra), is wholly misplaced at both of these judgments are in the context of the computation of capital gains and in the context of connotations of the expression transfer under section 2(47) things which, or the reasons set out above, are wholly irrelevant in the present context. 10. Let us, in this light, revert to the findings of the CIT(A) wherein, relying upon the provisions of Section 53A of the Transfer of Property Act, he comes to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer is the right to sell 1,28,940.26 sq. ft. constructed area in this project. In his closing stock, even if he is to substitute the part ownership of the land transferred with the value of this right to sell 1,28,940.26 square feet constructed area, it would not make any difference to the profit figures because, as far as this assessee, is concerned the cost of acquiring this right is the same as the cost of giving up the right in the hand, and, as is the settled legal position, the closing stock can only be valued at cost price or market price-whichever is less. Obviously, the cost price of this right to sell 1,28,940.26 sq ft, which has been treated as a trading asset, is less than the market price of these rights, and, therefore, these rights can only be valued at cost in the accounts. 15. Let us take a pause here and recall the conceptual reasons for valuing the closing stock at cost price or market price whichever is less. 16. In the landmark judgment of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], Hon ble Supreme Court has observed as follows: ..The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised. (Emphasis, by underlining, supplied by us) 17. The principle is thus unambiguous. The principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, and, at the same time, an anticipated loss to be deducted from commercial profits, at the first sign of its reasonable possibility. Accounting Standard 2, which is a mandatory accounting standard under section 145(2), also states that Inventories shall be valued at cost, or net realisable value, whichever is lower. There may seem to be, at first sight, an element of dichotomy in this approach inasmuch as anticipated losses are taken into account and anticipatory profits are ignored, but that is the impact of accounting principles sanctioned by the statute and the law laid down by Hon ble Supreme Court. 18. In view of these discussions, the conceptual foundation for this stock valuation principle are accounting principle of conser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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