DECIDED BY: ITAT, BENCH `A’, CHENNAI, IN THE CASE OF: R.Gopinath (HUF) Vs. ACIT, APPEAL NO: ITA NOS. 29 & 30/Mds/2008, DECIDED ON JULY 24, 2009
8. We have considered the rival contentions and the relevant records as well as the decisions cited by both sides. In the case in hand, the capital asset was converted into stock-in-trade by the assessee and thereafter a development agreement entered into by the assessee with the developer, whereby the assessee provided his land measuring 44,000 sq.ft. to the developer for construction of residential apartments, the developer agreed to construct 83,760 sq.ft. (approximately the saleable area as per the plan to be approved by the authorities). Out of the total constructed area, the owners of the land were to get constructed area of 25,130 sq.ft The assessee handed over the possession of the property to the developer for construction purpose and also agreed to make the application to the authorities concerned for sanction of plan and for all other requirements in respect of the construction and effectively carried out the building project including the permission for retaining the vacant land for construction of building for providing amenities like water, electricity, sewerage, etc. It is undisputed that once the property in question was converted to capital asset to stock-in-trade, Section 45(2) of the Income Tax Act, 1961 will be applicable for determining the year of taxing of the capital gain arising from the conversion of the capital asset to the stock-in-trade. Therefore, there is no dispute regarding the applicability of Section 45(2) of the Income Tax Act, 1961 in this case in respect to determine the year in which the capital gain chargeable to tax. The assessee also offered the capital gain by applying the provisions of Section 45(2) of the Income Tax Act, 1961 on the basis of constructed flats sold in the previous year relevant to the assessment year and accordingly proportionate capital gain arising from the transfer of land and building to stock-in-trade was offered. But the Assessing Officer was of the view that this stock-in-trade was sold and transferred at the point when the assessee entered into the development agreement dated 01.09.2003. Therefore, the entire long term capital gain is chargeable to tax in the assessment year 2004- 2005 because as per the Assessing Officer the stock-in-trade was sold / transferred in the year 2003. We may point out here that from the record it is apparent that apart from the development agreement and supplementary development agreement, there is no other document executed by the assessee. The Assessing Officer treated the transaction of handing over the possession of the land and building to the developer as transfer u/s.2(47) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) also held that the capital asset stands transferred in accordance with the provisions of Section 2(47) r.w.s.53A of Transfer of Property Act. In our view, the lower authorities have not taken a correct view by analyzing the transaction by applying the provisions of Section 2(47) of the Income Tax Act, 1961 which is applicable only in case of capital asset. As per Section 2(14) of the Income Tax Act, 1961, capital asset does not include* stock-in-trade. Therefore, once capital asset is converted into stock-in-trade provisions of section 2(47) becomes irrelevant and does not apply. The learned Departmental Representative has contended that the transfer of immovable property satisfies the conditions of Section 53A of the Transfer of Property Act, then the transaction of transfer is complete. He has urged that in the case in hand, Section 53A of Transfer of Property Act applies and despite the conversion of the property into stock-in-trade, transaction of handing over of possession of land and building to the developer as per the development agreement amounts to transfer. Therefore as per the provisions of Section 45(2), the capital gain arising on conversion of capital asset into stock-in-trade is chargeable to tax in the year 2003 when the development agreement was entered into by the parties. He has urged that the lower authorities have rightly held that the entire capital gain arising from conversion of capital asset into stock-in-trade will be chargeable to tax in the assessment year 2004-2005.
9. We are unable to agree with the contentions of the learned Departmental Representative that the transaction of transfer is complete by applying the provision of Section 53A of Transfer of Property Act on the date when the possession of the property was handed over to the developer as per the development agreement dated 01.09.2003. Section 53A of the Transfer of Property Act, does not provide the conditions for transfer but it provides protection to the transferee of any immovable property by a written contract, the terms of which constitute the transfer and can be ascertained with reasonable certainty and the transferee as part performance of the contract taken the possessions of the property and has performed or willing to perform his part of contract, then even the said contract though required to be registered has not been registered and the transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract Under the Income Tax Act, 1961 by inserting Clause (v) and (vi) of Section 2(47), the definition of the term transfer includes the transaction which fulfills the conditions provided u/s.53A of Transfer of Property Act. Therefore, Section 53A of the Income Tax Act, 1961 is borrowed only with respect to the transfer of capital asset as provided u/s.2(47) of the Income Tax Act, 1961 and the same is not applicable in other cases which do not fell u/s 2(47) of the Income Tax Act 1961. Section 45(1) of the Income Tax Act, 1961 deals with the profit and gain arising from the transfer of capital asset, whereas Section 45(2) deals with the profit or gain arising from the transfer by way of conversion of capital asset into stock-in-trade and shall be chargeable to income tax in the previous year in which such stock-in-trade is sold or otherwise transferred. Therefore, the time of chargeability to income tax of capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-trade is sold or otherwise transferred, whereas the chargeability of capital gain u/s.45 of the Income Tax Act, 1961 from transfer of capital asset shall be in the previous year in which the transfer took place including the transfer as provided u/s.2(47) of the Income Tax Act, 1961. The sale / transfer of stock-in-trade cannot be equated with the transfer of capital asset under section 2(47). The decisions relied upon by the learned Departmental Representative as well as the lower authorities are with respect to the transfer of capital asset u/s.2(47) of the Income Tax Act, 1961 and not in respect of stock-in-trade. Therefore, these decisions are not relevant and applicable in the facts of the present case. As far as Section 53A of the Transfer of Property Act is concerned, the said provides only a protection to the transferee on fulfillment of certain conditions provided therein but does not provide that even on fulfillment of that condition the transfer is complete. As per provision of Section 53A of the Transfer of Property Act when a right is created in favor of the transferee which cannot be defeated, otherwise then terms and conditions expressly provided in the contract itself.
10. From the development agreement dated 01.09.2003 as well as the supplementary agreement dated 23.12.2003, the assessee handed over the possession of the property for construction of residential apartments by the developer. The assessee did not receive any consideration for handing over the possession of the property to the developer but as per the agreement the assessee got the right to get the built-up area of 25,130 sq.ft. and proportionate car parks as per schedule E and El of the agreement and the rest of the constructed area was to be sold out for recovery of the cost and margin of the developer. From the development agreement, the possession was handed over for carrying out the construction work by the developer and there is no other document except the development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carrying out the construction work by the developer and the exclusive possession of the property in legal since remain with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assessee. One cannot presume any intension in executing the documents between the parties other than what was stated or can be inferred reasonably from the documents itself. A regard must be given to the words Used in the documents. The nature the transaction between the parties by way of development agreement cannot be said to be a sale of immovable property which is stock-in-trade or otherwise transfer as provided in the Transfer of Property Act. We agree with the contentions of the learned Authorized Representative of the assessee that/the meaning of the words, “otherwise transferred”, in Section 45(2), should be according to its Ordinary popular and natural sense, and it should not include a transaction referred to under sub-clause (v) of sub-section (47) of Section 2 in relation to a ‘capital asset. By no stretch of imagination, the said transaction can be termed as transfer more less as sale. When the legal title and possession of the property was with the assessee, then the transfer of the said is not possible merely by allowing the developer to carry out the construction work.
11. In the case of Ghanshyamdas Kishan Chander Vs. Commissioner of Income Tax, Andhra Pradesh (supra), the Hon’ble Andhra Pradesh High Court has observed as under:
“The definition of ‘transfer’ in relation to a capital asset Under the Income Tax Act, is different from the transfer of any interest in specific immovable property. Section 58(a) of the Transfer of Property Act defines ‘”mortgage” as the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan ” The transfer of an interest in specific immovable property is different from the transfer of the totality of interest in respect of a capital asset. The Sovereign Parliament, in bur view designedly used the expressions “sale”, “exchange”, “relinquishment of the asset”, “extinguishment the “compulsory acquisition of an asset under any law” in the definition of “transfer” under section 2(47) of the Income Tax Act. The definition is so clear as to take in only effective conveyance of the capital asset to the transferee. But, however, mere delivery of immovable property along cannot be treated to be equivalent to conveyance of immovable property so as to come within the definition of “transfer”. The definition is clear enough. If any authority is needed, we find it in Alapati Venkataramiah vs. Commissioner of Income Tax, Hyderabad reported in 57 ITR 185 (SC).
12. In the case of Vania Silk Mills Private Limited Vs. Commissioner of Income Tax (supra), the Hon’ble Supreme Court has held as under:
“that capital gains tax was attracted under section 45 by transfer and not merely by extinguishment of rights howsoever brought about. Whatever the mode by which the transfer was brought at out, the existence of the asset during the process of transfer was a precondition : unless the asset existed in fact, there could not be a transfer of it. The extinguishment of a right or rights should in any case be on account to its or their transfer in order to attract the provisions of Section 45. If it was not, and was on account of the destruction or loss of the asset, it was not a transfer and did not attract the provisions of Section 45 which related to transfer and not to mere extinguishment of a right. Hence, an extinguishment of right not brought about by transfer was outside the purview of Section 45.”
13. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property as held by the Hon’ble Apex Court in the case of Alapati Venkataramiah Vs. Commissioner of Income Tax, Hyderabad reported in 57 ITR 185. Until and unless the title of the property is passed to the purchaser, there cannot be a sale or transfer of immovable property, since in the present case the question is whether the handing over the possession under the development agreement of the property which is stock-in-trade of the assessee can be treated as a transfer by applying the definition of transfer in Section 2(47) of the Income Tax Act, 1961. As we have already stated earlier that in the case of stock-in-trade, the definition of transfer u/s.2(47) of the Income Tax Act, 1961 is not applicable; Therefore, the contextual or the ordinary meaning of the word transfer is applicable in the present case.
14. In the case of Deputy Commissioner of Income Tax Vs. Crest Hotels Limited (supra), the Mumbai Benches of this Tribunal has held as under:
“9. We have considered the rival contentions and the material on record. We are concerned here about the time of accrual of capital gains in case where capital asset is converted into stock-in-trade and the arisal of tax liability thereon. As per section 4$(1) capital gain arises on transfer of capital asset. Also, as per the said section, capital gain is chargeable to tax in the previous year in which the transfer takes place. As per section 2(14), capital asset does not include stock-in-trade. As per the inclusive definition of the term “transfer” given in section 2(47) of the Income Tax Act, sale is one of the several modes of transfer. Conversion of capital asset into or its treatment as stock-in-trade of the business carried on by the assessee is another mode of transfer as per the said definition. Section 45(2) acts as an exception to section 45(1). It [i.e. section 45(2)] provides that capital gain arising on account of conversion of capital asset into or its treatment as stock-in-trade (hereinafter “referred to as `conversion’ for short) shall be chargeable to tax in the previous year in which such stock-in-trade sold or otherwise transferred.
10. With this background let us consider the facts in the present case. In the case before us, conversion had taken place in June, 1986. As noted above, conversion is a mode of transfer under the Act. Thus, after June, 1986, the asset in question no longer remained a capital asset. As a consequence, what was sold in that years under consideration was part of stock-in-trade and not capital asset. If what was sold was not capital asset, one cannot go back to section 2(47) to ascertain whether transfer by way of sale is complete or not. In fact, in the instant case, the role of section 2(47) was relevant only in 1986 when conversion took place. Thereafter, it had no role to play to all, because it is meant for capital asset does not stock-in-trade. We have noted earlier that capital asset does not include stock-in-trade. Thus, all the arguments connected with section 2(47) made by either side have no relevance at all, in other words, the argument of the learned counsel that transfer can be effected only when conveyance is executed is of no significance. The alternate argument that transfer is effective only after the last flat is sold, in also of no significance. The observation of the Assessing Officer about the applicability of Clause (v) and (vi) of section 2(47) is also irrelevant.
11. Transfer has already taken place in 1986. Section 45(2) merely fixes the year of liability. The year of liability is the year in which stock-in-trade is sold. The fact that stock-in-trade is sold in parts in the years under consideration cannot be disputed because the real profit that arises on sale of stock-in-trade is business profit which the assessee itself has offered for taxation. If sale of stock-in-trade is not denied. t as per section 45(2) which only fixes the year of liability assssee cannot deny his tax liability on capital gains alsc by fiction, had already arisen in 1986. The legislature * wisdom, considering the fact that on conversion only notional income has arisen postponed the tax liability: thereon till real income was earned on that asset. The assessee cannot, in our opinion, further postpone the liability beyond the point of time contemplated by section 45(2). In short, tax liability on the capital gain on conversion will arise in the same year/s in which business profit arises to the assessee on sale of such asset. The asset cannot have dual characteristic at the same point of time in the hands of the same person, which view the assessee has sought to canvass before us. This is not contemplated by any of the provisions of the Act and hence cannot be accepted. By assessee’s own action, the asset had assumed the characteristic of stock-in-trade. Hence when business profit on sale of such stock accrues to the assessee; tax oh capital gain also will be levied in the same year as is envisaged by section 45(2). In such an event, all the arguments relating to conveyance, possession, etc., which are generally related to transfer of capital asset are rendered meaningless.
12. In the instant case, the assessee itself having recognized business profits on sale of converted asset in the year under consideration tax on capital gains on conversion will be levied in these years according to the are sold by the assessee in each year. In view of the foregoing discussion, we allow the ground of the Department for all the three years.”
In the above said ease, the Mumbai Bench of this Tribunal has elaborately discussed the identical issue and held that the legislature in its wisdom considering the fact that on conversion of capital asset into stock-n-trade only the notional income has arisen postponed the tax liability therein till the real income was earned Of that asset and further held that the tax liability on the capital gain on conversion will arise in the same year in which business profit arises to the assessee on sale of such asset. In the case of Octavius Steel & Company Limited Vs. Assistant Commissioner of Income Tax (supra), the Special Bench, KoTRala of’tnis. Tribunal 1la”s_heiaTfrparagraph 11 as under:
“Section 45(2) starts with a non obstante clause. Therefore, the provision of Section 45(2) supersedes all the other provisions. Under this Sub-section (2) of Section 45, it is clear that capital gain shall be charged in the previous year in which such stock-in-trade which is known to be so only after conversion, is sold or otherwise transferred. Admittedly, the transfer of stock-in-trade in the present case was effected by way of registered deed of conveyance fduring the present assessment year. Therefore, the first appellate authority was justified in holding that capital gain is to be computed in the previous year even though that conversion was effected before lst April, 1985. This Subsection supersedes provision of “Sub-section (1) and provides for charging of capital gain in the year when the converted stock-in-trade is sold or otherwise transferred. For the purpose of Section 48 also this section has provided the method for computing capital gain in such circumstances, i.e. fair market value of the asset on the date of such conversion shall fee deemed to be the full value of the consideration received or accruing as a result of transfer of capital asset. There is no ambiguity in the said provision. Under Section 2(47)(iv) which provision also came into effect from 1st April, 1985, when an asset is converted by the owner as stock-in-trade of business, such conversion is to be treated as transfer. Corresponding amendment was made in Section 45 for computing capital gain arising out of such transfer. In the present case the asset was converted into stock-in-trade before 1st April, 1985. Even assuming that before 1st April, 1985, such conversion cannot be said to be transfer within the meaning of Section 2(47)(iv) but admittedly after 1st April, 1985, the extended meaning of the word “transfer” is applicable in respect of such conversion. However, capital gain cannot be computed unless such stock-in-trade is sold or otherwise transferred, The gain arises only on sale or transfer otherwise. It does not amount to giving retrospective effect to the statutes but applying the law applicable on the date of taxable event, i.e. sale of converted assets. Circular No.397, dated 16th October, 1984 also clarifies that the capital gain in cases of converted assets in closing stock would be chargeable in the year when such converted asset is actually sold as stock-in-trade. In other words, not in the year of conversion but year of actual sale. The assessee was therefore liable to the capital gains tax notwithstanding that the conversion of the capital asset into stock-in-trade took place prior to 1st April, 1985.
15. In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not at the time when the development agreement was entered into. Moreover, in the development agreement, the assessee has not agreed for sale of the entire constructed property on the land, the assessee has agreed only a portion of the constructed property for sale for the purpose of recovery of the cost 01 construction and margin of the developer. The assessee has executed all the sale deeds for transfer of the constructed apartments in favor of the end-user / purchaser, therefore the transfer of the proportionate land took place only when the assessee transferred the construction property by way of sale deeds and offered the business income which was accepted fey the Department. In any case, when the assessee has retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, we hold that the orders of the lower authorities, qua this issue are not sustainable on the facts as well as on law. We set aside the orders of the lower authorities, qua this issue and direct the Assessing Officer to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered.