Shri Challa Ramakrishna Vs ACIT (ITAT Hyderabad)
According to the CIT, the capital gain has arisen in the relevant A.Y because the assessee has entered into a joint development agreement (JDA) with M/s. Sri Sai Developers to develop the land which has been converted from capital asset into stock in trade during the relevant financial year. As per section 45(2) of the I.T. Act, where a capital asset is converted into stock in trade, the capital gain would be taxable in the year in which the stock in trade is transferred. Undisputedly, the joint development agreement has been entered into in the relevant financial year. The learned Counsel for the assessee had argued that the provisions of section 2(47)(v) are applicable only to transfer of a capital asset u/s 53A of T.P. Act. He submitted that the said provision is not applicable to stock-in-trade which can be considered as transferred only when it is sold. In support of this contention, he placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of Smt. Girija Rani in ITA No.165/Hyd/2017.
ITAT held that Stock- in-trade can be considered as transferred 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.
An order u/s 263 is sustainable only if the assessment order is both erroneous as well as prejudicial to interest of the Revenue
Conclusion: The twin conditions, of assessment order being erroneous as well as prejudicial to the interest of the revenue, needs to be satisfied before initiating and also passing of an order u/s 263, however, since the said conditions has not been satisfied in the present case, the CIT order u/s 263 was set side.
Facts: ROI of the assessee was selected for scrutiny under CASS and accordingly AO added STCG, LTCG and income from other source and being aggrieved the assessee preferred an appeal before CIT(A).
Meanwhile, CIT u/s 263 perused the assessment order and observed that the assessee had converted capital asset into stock-in-trade and had entered into a registered joint development agreement (JDA) with M/s. Sai Developers and as per the JDA the assessee was entitled for 39% of undivided share of land; super built up area and car parking area. CIT observed that the conversion of capital asset into stock-in-trade and entering into JDA is in the same year and attracts the provisions of section 45(2) of the Act and accordingly issued a show cause notice to the assessee.
Held: An order u/s 263 is sustainable only if the assessment order is both erroneous as well as prejudicial to the interest of the Revenue.
With regard to assessment order being erroneous, it was held that 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 the same is not prejudicial to the interest of revenue.
With regard to the assessment order being prejudicial to the interest of revenue, it has been held that from various earlier judgements, it is clear that the stock-in-trade can be considered as transferred 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. Since, 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 the CIT order u/s 263 was set aside.
FULL TEXT OF THE ITAT JUDGEMENT
This is assessee’s appeal for the A.Y 2013-14 against the order of the Pr. CIT, Kurnool, dated 20.03.2018.
2. Brief facts of the case are that the assessee, an individual, filed his return of income for the A.Y 2013-14 on 19.03.2014, admitting a total income of Rs.1,50,16,090/-. The case was selected for scrutiny under CASS and accordingly, the AO completed the assessment by bringing to tax, (i) short term capital gain; (ii) long-term capital gains; and (iii) income from other sources and arrived at the total taxable income of Rs.2,26,59,354/-. Aggrieved by the same, the assessee preferred his appeal before the CIT (A).
3. Meanwhile, the Pr. CIT, Kurnool u/s 263 of the I.T. Act, perused the assessment order and observed that the assessee, along with his brother Shri C. Seetharam Babu, had purchased 24,960 sft of converted land (agricultural land converted to non-agricultural land) in survey No.16, situated at Anantapura Village of Bangalore vide Registered Sale Deed Document No.3153/2011-12, dated 07.09.2011 and that he had held it as a capital asset as on 31.03.2012, but converted the same to stock-in-trade in his books of account in the financial year 2012-13, and that in the same financial year, the assessee and his brother entered into a registered joint development agreement vide document No.779/2012-13 dated 16.05.2012 with M/s. Sri Sai Developers, Bangalore. He observed that as per Para 5 of the JDA, the assessee and his brother are entitled to 39% of the undivided share of land; super built up area and car parking area etc., while the Developer was entitled to 61% of the undivided share of land, super built up area and car parking area etc. He observed that the conversion of capital asset into stock-in-trade and entering into JDA is in the same year and therefore, attracts the provisions of section 45(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. Sri Sai Developers, Bangalore in the previous year relevant to the A.Y 2016-17 and as such, capital gains thereon arose u/s 45(2) in the assessment year 2016-17. Further, it also submitted that the additions made by the AO are the subject matter of appeal before the CIT (A) regarding the chargeability of the STCG in the A.Y 2013-14 and since the issue is pending for adjudication before the CIT (A), the AO may be directed to submit before the CIT (A) for enhancement of short term capital gain. It is also submitted that since the AO has taken one of the possible views in computing the short term capital gain, the Pr. CIT does not have jurisdiction u/s 263 and in support of the same, the assessee relied upon the judgment of the Hon’ble Andhra Pradesh High Court in the case of CIT vs. Usha Kiran Movies Ltd (2014) 363 ITR 165 (A.P).
ii) Vide JDA with M/s. Sri Sai Developers, the assessee and his brother are having 39% of the rights of the super built up are, car parking etc., and income would arise only at the time of exercising the rights and since the assessee exercises his right in the previous year relevant to the A.Y 2016-17, the same is taxable in the same A.Y.
iii) The assessee is not in possession of vacant flats received vide JDA dated 19.08.2011. The assessee received 24 residential flats, out of which, 22 were sold in the financial year 2012-13, and the remaining flats were sold in the subsequent years. However, the new provision u/s 23(5) is applicable only w.e.f. 1.4.2018 and therefore, the said income cannot be brought to tax in the A.Y 2013-14.
4. The Pr. CIT considered the above objections of the assessee and held that:
i) The provisions of section 45(2) speaks about capital gain arising out of the transfer by way of the conversion of the capital asset into stock-in-trade which shall be chargeable to Income Tax in the previous year in which such stock in trade is sold or otherwise transferred by him. The CIT held that since the assessee has entered into JDA in the same financial year in which the capital asset was converted into stock-in-trade, as the assessee and his brother transferred the rights to exploit the stock in trade for construction of multi-storied building and therefore short term capital gain has accrued to the assessee in the previous year, relevant to the A.Y 2013-14. With regard to the computation of short 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 assessee is in appeal before us by raising the following grounds of appeal:
“1. The impugned Revisionary Order dtd: 20-03-2018 passed U/s. 263 of the Act by the Learned PCIT, Kurnool is opposed to law, facts and circumstances of the case.
2. The Ld. PCIT has erred in assuming the jurisdiction u/s. 263 of the Act without appreciating the pendency of an Appeal filed by the Appellant against the Protective Assessment Order dtd:31-03-2016 and also in contravention of the explanation (c) provided to section 263 of the Act.
3. The Ld. PCIT has erred in holding that the STCG are exigible to Tax for the A. Y 2013-14 in respect of the Capital Asset which was converted into Stock in trade in the F.Y 2012-13 without appreciating the fact that the Capital Gains on conversion of Capital Asset into Stock in trade are chargeable to tax in the year in which such converted Stock in trade was sold as per section 45(2) of the Act.
4. The Ld. PCIT has erred in holding that the Assessee’s share of Cost of Improvement of Rs. 63,67,500/- needs verification without appreciating the fact that such an issue did not form part of the Show Cause Notice dtd: 1001-2018 and thereby the Principles of Natural Justice are defeated.
5. The Ld. PCIT has erred in holding that the Business income on account of transfer of Stock in trade vide JDA dtd: 16-05-2012 is taxable for the A.Y 2013-14 on the ground of Mercantile System of accounting followed by the Appellant without appreciating the fact that the taxability of Capital Gain arises in the previous year in which the stock in trade was sold and not in the year of JDA.
6. The Ld. PCIT has erred in holding that the taxable Business income is the difference between 39% of the Cost of Construction of the project to the Developer and the FMV of 61 % of the Land on the date of conversion of Capital Asset into Stock in trade in the A.Y 2013-14 without appreciating the fact that the Business Income is chargeable to tax in the previous year in which the stock in trade was sold and not in the A.Y 2013-14.
7. The Ld. PCIT has not appreciated the fact that the Appellant has voluntarily declared the business income in the A.Y 2016-17 relating to the JDA entered into with M/s. Sai Developers.
8. The Ld. DIT has erred in holding that the notional rent being income from House Property of 2 unsold vacant flats received 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 Rs. 1,50,16,090/- consisting of income from Business, Capital Gains and income from other sources ..
2. The return of income so filed was selected for Scrutiny Assessment under CASS and thereafter a Scrutiny Assessment was completed on 31-03-2016 on protective basis determining the total income at Rs. 2,25,49,354/- as detailed below as against the declared income of Rs. 1,50,16,0901-.
