ITAT: CIT(A) Cannot Bypass Rule 46A; If Property Is Stock-in-Trade, Section 43CA Must Also Be Examined

ITO Vs Narne Constructions Private Limited (ITAT Hyderabad)

ITAT: CIT(A) Cannot Bypass Rule 46A; If Property Is Stock-in-Trade, Section 43CA Must Also Be Examined

The Hyderabad ITAT set aside the order of the CIT(A) after holding that he had admitted additional evidence behind the back of the Assessing Officer and granted relief without following the mandatory procedure prescribed under Rule 46A. The Tribunal observed that annual reports and financial statements relied upon by the CIT(A) to conclude that the land was held as stock-in-trade were filed for the first time in appellate proceedings and ought to have been confronted to the AO for comments before being admitted.

The dispute arose when the AO invoked section 50C and computed capital gains by adopting the stamp duty value of land transferred by the assessee-company to its group concerns. The CIT(A), however, held that the land constituted business inventory (stock-in-trade) and therefore section 50C, which applies only to capital assets, was not attracted.

While the Tribunal did not express any final view on the merits, it observed that if the CIT(A) was of the opinion that the land was indeed stock-in-trade, then he could not simply stop after holding section 50C inapplicable. Being vested with co-terminus powers with the Assessing Officer, he was required to examine the applicability of section 43CA, the specific provision dealing with transfer of land or building held as stock-in-trade.

Accordingly, the ITAT restored the matter to the file of the CIT(A) for fresh adjudication after complying with Rule 46A and after examining all relevant provisions, including section 43CA wherever applicable.

FULL TEXT OF THE ORDER OF ITAT HYDERBAD

The present appeal filed by the Revenue is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (for short, “CIT(A)”), dated 12/09/2025, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under section 143(3) of the Income Tax Act, 1961 (for short, “the Act”), dated 28/12/2017. The Revenue has assailed the impugned order of the CIT(A) on the following grounds of appeal:

“1. The learned CIT(A) erred in admitting and relying upon additional evidences such as annual reports, inventory schedules, and accounting policies-submitted for the first time before the appellate authority, without recording reasons for their admission and without affording any opportunity to the Assessing Officer to examine or rebut the same, thereby violating the mandatory provisions of the Rule 46A of the Income-tax Rule, 1962.

2. The learned CIT(A) erred in not directing the Assessing Officer to examine the applicability of section 43CA of the Income-tax Act, 1961, which specifically governs undervalued transfers of land/building held as stock-in-trade, particularly when the assessee’s own claim was that the property was business inventory.

3. The learned CIT(A) erred in not considering the applicability of section 43CA, which was already in force during the relevant assessment year.”

2. Succinctly stated, the assessee company had e-filed its return of income for AY 2015-16 on 29/09/2015, declaring an income of Rs.3,27,597/-. Subsequently, the assessee company’s case was selected for scrutiny assessment under section 143(2) of the Act.

3. During the course of the assessment proceedings, the AO observed that the assessee company had, during the subject year, sold two properties for the documented value, viz., vide Document No.13845/14, dated 30/03/2013: Rs.15,00,000/-; and (ii) vide Document No.13844/14, dated 26/12/2012: Rs.7,50,000/-. However, it was observed that the registered values of the properties were Rs. 22,02,20,000/- and Rs. 11,01,10,000/-, respectively, and the said documents were registered on 24/09/2014.

4. The AO observed that a perusal of the return of income filed by the assessee company revealed that it had not disclosed any capital gains on the transfer of the aforementioned properties. On being queried, the assessee company claimed that it had purchased the subject land vide SAGPA 4645/98 dated 22/06/1998. Elaborating further, it was stated that in order to consolidate the land holdings and perfect the title of the land it was decided to transfer the land in favour of its group companies, viz., (i) CIHIPL; and (ii) SVPL vide sale deed Nos.13844/14 on 26/07/2012 and 13845/14 on 30/03/2013, and since then the said group companies were in possession of and in enjoyment of the land as their inventory. It was further stated that the aforesaid inventory, after being developed as a real estate project, would be sold, and the income arising from its sales, after deducting the expenditure, would be duly offered for tax.

5. The AO observed that it was the claim of the assessee company before him that the subject properties in question were held as inventory by its group companies and, thus, no capital gain arose therefrom. However, the AO did not find favor with the assessee company’s aforesaid explanation. It was observed by him that the assessee company was the owner of the subject properties vide Document No. 4645/98, dated 22/06/1998, through a General Power of Attorney-cum-Agreement, wherein it had parted with an amount of Rs. 32.50 lakhs to obtain vacant physical possession of the said properties. It was observed that the assessee company had vide Document No.13844/14 and Document No.13845/14 sold the subject properties to its group companies, a fact which would safely be gathered from the balance sheets of the group companies, which had shown the aforementioned properties in their balance sheets for the year under consideration. It was further observed that though the documents were presented for registration on earlier days, they were actually registered on 24/09/2014, i.e., the period relevant to the year under consideration. Also, the AO observed that the assessee company had itself recognized the sale during the subject year, i.e., AY 2015-16.

6. The AO, based on his aforesaid observations, concluded that the assessee company, which had purchased the subject property in Financial Year 1998-99, sold the same during the subject year, i.e., Financial Year 2014-15. Thereafter, the AO adopted the value determined by the Registrar, i.e., the SRO value, as the deemed sale consideration under section 50C of the Act, i.e., Rs. 33,03,30,000/-, and computed the capital gains at Rs. 32,08,48,519/-. The AO vide his order passed under section 143(3) of the Act, dated 28/12/2017, determined the income of the assessee company at Rs. 32,08,48,519/-.

7. Aggrieved, the assessee company carried the matter in appeal before the CIT(A) who therein observed, viz., (i) that the nature of the lands transferred by the assessee company to its group companies were in the nature of stock-in-trade and not a capital asset; (ii) that once it is established that the land transferred by the assessee company is stock-in-trade, the applicability of the deeming provisions of section 50C of the Act which is confined to transfer of capital assets stands excluded. Apart from that, we find that the CIT(A) observed that Section 43CA of the Act was introduced vide the Finance Act, 2013, w.e.f. 01/04/2014, which specifically addressed the sale of land/building held as stock-in-trade by an assessee. The CIT(A) in the backdrop of his aforesaid deliberations observed that the land transferred by the assessee company was not in the nature of a capital asset but its stock-in-trade, which, thus, excluded the applicability of provisions of section 50C of the Act. Thereafter, the CIT(A) observed that a similar provision under section 43CA of the Act had been made available on the statute vide the Finance Act, 2013, w.e.f. 01/04/2014, but refrained from computing the income of the assessee company under the said statutory provision for the reason that the AO had not made any reference to section 43CA of the Act in his order.

8. The Revenue, aggrieved with the order of the CIT(A), has carried the matter in appeal before us.

9. We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities, and considered the material available on record.

10. Shri Waseem UR Rehman, Learned CIT-DR, at the threshold of hearing of the appeal assailed the order passed by the CIT(A) on the ground that he had, while disposing of the appeal, admitted certain documentary evidence at the back of the AO, i.e., in contravention of the procedure contemplated under Rule 46A of the Income Tax Rules,1962. Elaborating further on his contention, the Ld. CIT-DR submitted that the assessee company, in the course of hearing of the appeal had in order to impress upon the CIT(A) that the subject land transferred by the assessee company was not a capital asset but stock-in-trade filed before him the annual report and financial statements of the assessee company for the two preceding years, i.e., Financial Year 2012-13 and Financial Year 2013-14. Elaborating on his contention, the Ld. CIT-DR submitted that the CIT(A) grossly erred in law and facts of the case in not confronting the aforesaid documentary evidence and calling for a report from the AO, and had summarily, at the latter’s back, admitted the said documents and disposed of the appeal.

11. Alternatively, the Ld. CIT-DR submitted that now when the CIT(A) has observed that the land transferred by the assessee company was not a capital asset, but its stock-in-trade, then, he, being vested with the powers co-terminus with that of the AO, ought to have invoked the provisions of section 43CA of the Act and computed the corresponding income in the hands of the assessee company, which, he had failed to do. The Ld. CIT-DR submitted that the matter, in all fairness and in the interest of justice, be set aside to the file of the CIT(A) with a direction to re-adjudicate the same after affording a reasonable opportunity of being heard to the AO on the issue of admission of the documentary evidence which had been filed by the assessee company before him.

11. Per contra, Shri Satish Kumar, Learned Authorized Representative (for short, “Ld. AR”) for the assessee company, relied upon the order of the CIT(A). It was submitted that as the CIT(A) had, based on a well-reasoned order, vacated the addition made by the AO under section 50C of the Act, there was no merit in the appeal filed by the Revenue, which, thus, was liable to be dismissed.

12. We have given thoughtful consideration to the observations of the CIT(A) and are unable to persuade ourselves to concur with the same. In our view, the CIT(A), before admitting the annual report and financial statements of the assessee company for the preceding two years, i.e., Financial Year 2012-13 and Financial Year 20-13-14 ought to have confronted the same to the AO and called for his report, before admitting the same as required per the mandate of Rule 46A of the Income Tax Rules, 1962. We are of firm conviction that the summary admission of the annual report and financial statements of the assessee company for the aforementioned preceding years by the CIT(A) is clearly in violation of the procedure contemplated under Rule 46 of the Income Tax Rules, 1962, which, thus, cannot be endorsed on our part.

14. Apart from that, we find substance in the Ld. CIT-DR’s contention that in case the CIT(A) was of the view that the subject lands transferred by the assessee company during the year under consideration were in the nature of stock-in-trade, then irrespective of the fact that the AO had not made any reference with respect to section 43CA of the Act in his order, the CIT(A) was vested with the powers co-terminus with that of the AO for taking cognizance of the said serious infirmity pertaining to the subject matter of appeal before him, and ought to have determined the income of the assessee company by invoking the deeming provisions of section 43CA of the Act.

15. Be that as it may, we are of firm conviction that, as the CIT(A) has flouted the procedure contemplated in Rule 46A of the Income Tax Rules, 1962, while admitting the aforementioned additional documentary evidence, the order so passed by him cannot be approved on our part. In our view, the matter in all fairness requires to be set aside to the file of the CIT(A) with a direction to re-decide the appeal after confronting the additional documentary evidence produced by the assessee company before him to the AO and calling for his report as contemplated under Rule 46A of the Income Tax Rules, 1962.

16. We thus, in terms of our aforesaid deliberations, set aside the matter to the file of the CIT(A) with a direction to re-decide the appeal afresh based on our aforesaid observations.

17. In the result, the appeal filed by the Revenue is allowed for statistical purposes in terms of our aforesaid observations.

Order pronounced in the open court on 12^th June, 2026.