Capital gain would only be charged in the year in which stock-in-trade would be sold

Brief of the case:

These are the appeals filed by revenue against which assessee also filed cross-objection relevant to three AYs. In these cases ITAT examined various issues and held that capital gain on transfer of land held as stock-in-trade can be made only in the year in which stock-in-trade was sold and not in year in which agreement was made. In an another issue in another AY ITAT remitted the matter to AO to examine the cost of land where assessee determine the cost by relying upon the report of registered valuer and AO used fair market value as cost price of the land to compute capital gain. In an another issue ITAT also held that AO cannot make any addition u/s 14 A read with rule 8D without recording any satisfaction.

Facts of the case:

• Assessee has entered into a project development agreement with M/s Arif Industries Ltd. to develop company’s group housing-cum-shopping project on the company’s land.
• In the revised return filed by the assessee, long term capital loss was claimed at Rs.68,42,57,966.30. For this purpose, the land of the assessee-company was converted into stock-in-trade.
• The value of the land as on 1.4.2003 relevant to the financial year 2003-04, on conversion into stock-in-trade was taken at Rs.1,25,93,70,545.20.
• The value of the land as on 1.4.1981 was worked out at Rs.1,94,36,28,541.50 (indexed cost) on the basis of valuation reports dated 19.3.2001, 25.3.2001 and 13.6.2002 of the Government Approved Valuer. The difference being Rs.68,42,57,966.30 was claimed as long term capital loss.
• AO examined the transactions of transfer of land into stock-in-trade with reference to provisions of section 2(47) and held the same to be a transfer within the meaning of section 2(47)(v) and 2(47)(vi) of the Act.
• AO worked out the long term capital gains at Rs.37,31,686/-.
• AO, on the basis of certain advances received by the assessee from M/s Arif Industries Ltd., concluded that conversion of the company’s land into stock-in-trade and agreement with the said company constituted transfer under section 2(47) of the Act and assessed the long term capital gains.

Contention of the revenue:

• By entering into a project development agreement during the year with a builder, the assessee has transferred this land and was thus liable to capital gains during the year under consideration.
• As per agreement the consideration for the transfer of the land had also been settled being a certain area of constructed property. As such capital gains has already arisen during the year order consideration, since section 2(47) defines ‘transfer’ as including ‘exchange’.
• In the present case the assessee has exchanged unbuilt land for built up area.
• The valuer’s report is based on the value of a very small piece of land which was sold by auction in 1985. The valuer has projected this value backwards to obtain a hypothetical value as on 1.4.81. This is not an accepted method of valuation and is variance with the circle rate fixed by DM and also of the comparable sale instances of that year.
• AO has neither identified any income shown by the assessee which does not form part of total income or that he has not identified any expenditure which has been incurred by him for such income while deleting the disallowance made u/s 14A of the I.T. Act, 1961. Such items of income and expenditure have been clearly identified and are a part of the record.

Contention of the assessee:

• It is settled law that once the capital asset is converted into stock in trade provisions of section 2(47)(iv) read with section 45(2) the Income Tax Act 1961 were applicable and the capital gain is taxable in the year such stock is sold or transferred.
• The Project development agreement dated 26.06.2003, does not give rise to any “Transfer” for the assessment year 2004-05 within the meaning of section 45(2).
• In the subsequent years for AY 2007-08 and AY 2008-09 and AY 2009-10 AO had accepted the project development agreement being entered into for construction of metro city and not for transfer of land to Developers and had lawfully applied the provisions of section 45(2) of the Act on the transfer of land – stock in trade.
• After conversion into stock-in-trade, the asset in question no longer remains a capital asset, as nothing was sold in the year and when the land was converted into stock-in-trade, one cannot go back to section 2(47) of the Act.
• That, stock-in-trade was sold in financial year 2007-08 by the assessee in part and therefore, the real profit that arises on sale of stock-in-trade is business profit which assessee itself has offered for taxation in assessment year 2008-09.
• Assessee has adopted the deemed value of the land as on 1.4.1981 on the basis of the valuation report prepared relying upon the land sold through public auction in the year 1985 which is very close to the land of the assessee.
• AO is not an expert in determining the value of the land. If he has any doubt with regard to the valuation adopted by the assessee as on 1.4.1981, he could have made a reference to the DVO for the determination of the value of the land, but he did not do so and has adopted the value of his own without any basis.

Held by the CIT (A):

• Capital gain on conversion of land into stock-in-trade in the financial year relevant to the impugned assessment year i.e. 2004-05 is chargeable to tax in the year in which it is sold and not in the year under consideration.
• AO has rejected the valuation report of the registered valuer for no apparent reason. In case the Assessing Officer was not satisfied with report of the registered valuer, a reference could have been made to the Valuation Officer under section 55A of the Act.

Held by ITAT:

• In the case of Chaturbhuj Dwarkadas Kapadia vs. CIT 260 ITR 491 (Bombay), their Lordships of the Hon’ble Bombay High Court has held
  • “in order to attract section 53A for the following conditions need to be       fulfilled.
  • There should be a contract for consideration;
  • it should be in writing;
  • it should be signed by the transferor;
  • it should pertain to transfer of immovable property;
  • the transferee should have taken the possession of the property;
  • lastly the transferee should be ready and willing to perform his party of the contract.
• In the case of R. Gopinath (HUF) vs. ACIT 133 TTJ 595 (Chennai), the Tribunal has held that section 53A of the Act of the Property Act does not provide the conditions for transfer but it provides protection to the transferee of any immovable property by a written contract.
• Where the assessee has converted its land into stock-in-trade and thereafter a development agreement was entered into by the assessee with the developer, the capital gain arising from the conversion of the land converted into stock-in-trade were assessable proportionately in the previous year in which the constructed property was sold by the assessee and not in the year of development agreement.
• The question of acquisition of cost price was not examined by the AO and it was remitted back to the file of AO for considering afresh.