DCIT Vs BHP (1981) Pvt. Ltd (ITAT Kolkata)
ITAT Kolkata held that income from sale transaction of impugned land property by applying provisions of section 45(2) of the Income Tax Act should be done after obtaining the pending valuation report from DVO to arrive at fair market value as on the date of conversion.
Facts
During the year under consideration, assessee had sold a piece of land and tin shed structure on it, to one S.R. Trexim Pvt Ltd. vide registered sale deed. Market value of the said property on the date of execution of sale through registered deed was assessed at Rs. 7,64,99,960/-.
Notably, the total value of the property was accounted in the books of accounts of the assessee for FY 2007-08 relevant to AY 2008-09. However, assessee converted the said capital asset into stock-in-trade and reported the same as part of its stock-in-trade in its audited balance sheet.
AO rejected the claim of the assessee on sale of land with tin shed as stock-in-trade and concluded the assessment by treating the impugned property as capital asset. AO gave credit for the amount of business income of Rs. 87,11,258/- by reducing it from the business income declared by the assessee to compute the assessed total income for the year.
Both AO and CIT(A) left the calculation of income on the sale transaction of impugned land property midway, owing to non-availability of fair market value of impugned land property on the date of conversion. Importantly, CIT(A) giving relief to the assessee has accepted the income from the sale transaction of the impugned land as business income as claimed by the assessee in its return.
Conclusion-
We find that in the present set of facts, it is proper to set aside the order of CIT(A) on the issue of income from sale transaction of land property and remit the matter back to the file of CIT(A) to call for and obtain the pending valuation report from the DVO for which he had directed the AO.
Based on the valuation report of the DVO, examination of the veracity of claim of conversion and the remand report from the ld. AO, if any, Ld. CIT(A) is directed to arrive at both the components of income from sale transaction of the impugned land property by applying the provisions of section 45(2) of the Act and decide the issue accordingly. The assessee is also directed to cooperate with the Ld. DVO and Ld. CIT(A) in having the valuation done to arrive at the fair market value of the impugned land property as on 31.03.2008 i.e. the date of conversion.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal by the revenue is arising out of the order of Commissioner of Income-tax(Appeals) – 4, Kolkata in appeal number 80/CIT(A)-4/2016-17 dated 21.06.2018 against the assessment order passed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act) by DCIT, Circle – 10(1), Kolkata, dated 16.03.2016.
2. Brief facts of the case are that assessee is a private limited company engaged in the business of manufacturing of pharmaceutical goods. Return of income was filed on 29.09.2013, reporting total income of Rs.33,00,927/-. During the year under consideration, assessee had sold a piece of land having an area of 120.5 cottahs (more than 6 bighas) and tin shed structure on it, to one S.R. Trexim Pvt. Ltd. on 18.03.2013 vide registered sale deed. Market value of the said property on the date of execution of sale through registered deed was assessed at Rs.7,64,99,960/- by registering authority for the purpose of stamp duty. The said piece of land was conveyed in favour of the assessee on 31.07.2007 for Rs.85,72,068/-with further addition (improvements) of Rs.55,64,298/- made during the same year. Thus, the total value of the property was accounted at Rs.1,41,36,366/- (Rs.85,72,068 + Rs.55,64,298) in the books of accounts of the assessee for FY 2007-08 relevant to AY 2008-09. On 31.03.2008, assessee converted the said capital asset into stock-in-trade and reported the same as part of its stock-in-trade in its audited balance sheet as at 31.03.2008.
2.1. In the course of assessment, Ld. AO enquired about the transaction of sale of this property seeking the following details (as reproduced in the order): –
“1. Please furnish the Audit report and Tax Audit report with accounts and balance sheet (If every year from the year in which you have purchased the Land at Cossipore and sold during this year i.e. F.Y.2012-13.
2. Furnish the certified copy of both obverse and reverse side of purchase deed of Land at Cossipore.
3. Please confirm whether the said land has ever been included in assets or not? If the same has been included in assets then mention the year with date of conversion of such asset in stock-in -trade.
4. Furnish the item wise Trading accounts including purchase, sales, closing stock, and opening stock of each year starting from the year in which the Land at Cossipore has been purchased.
5. How many lands and buildings you have actually purchased for your trading business since the year in which such land has been purchased first to till this date?
6. Copy of Memorandum of Association & Articles of the Company.”
2.2. Assessee replied to the show cause letter of the Ld. AO by furnishing the following details vide letter dated 09.03.2016 placed in the paper book at page 57-58 (as reproduced in the order): –
“1. Audit Report and the Tax audit report for the assessment year 2008-09 is attached in which the land property was registered in favour of the company and converted into stock in trade at cost. The same was sold during the financial year 2012-13.
2. Photocopy of Purchase deed of the aforesaid property is attached.
3. The said land property was previously held as assets and converted as stock in trade as on 31-03-2008.
4. Regarding the requirement of item-wise trading account, purchase, sale, closing stock and opening stock, your kind attention drawn to the fact that the company has already discontinued its business and has no- staff and the task of preparing the details will also require hiring of personnel and also good deal of time. Therefore, your- good self is requested to advise accordingly.
5. The aforesaid property is the only property since then which held s stock in trade.
6. Photocopy of Memorandum of association & Articles of association is attrached.”
[emphasis supplied by us by bold and underline]
2.3. From the perusal of the details furnished by the assessee, Ld. AO noted that there was no clause of doing any business like dealing in land and building, promoting of building construction, contained in the object clause of the Memorandum and Articles of Association of the assessee. Upon enquiry by the Ld. AO on this aspect, assessee submitted that a special resolution was passed by the members of the assessee company to do real estate business based on which the property sold during the year was treated as stock in trade since AY 2008-09. To substantiate this claim, assessee could not produce receipted copy of challan filed with ROC as it was not traceable by the assessee.
2.4. Considering the above submissions made by the assessee, Ld. AO observed that assessee has not dealt with any other land and building except with the impugned land since its inception. Ld. AO also noted that assessee could not furnish any registered or duly approved Memorandum and Articles of Association by the Registrar of Companies incorporating the objectives for carrying out the business of dealing in land and building, promoting of building construction, which was not incorporated in the object clause initially. Accordingly, Ld. AO completed the assessment by treating the impugned property as capital asset instead of treating it as stock in trade as done by the assessee. Ld. AO rejected the claim of the assessee on sale of land with tin shed as stock in trade as part of business income. Based on the conclusion drawn by the Ld. AO, he computed the long-term capital gain by applying the provisions of section 50C read with section 2(14) of the Act
