2015 (7) TMI 839 - AT - Income Tax

Treating the agreement for sale of land as sales - Whether there is a sale of the lands having regard to the terms of agreement of sale and as well as the method of accounting followed by the Respondent-Assessee Company - CIT exercising the power of revision u/s 263 had set aside the assessment to re-examine afresh whether the transaction of the Agreement of Sale, the Respondent Company had with M/s. Leo Edibles and Fats Limited, it amounted to sale or not and to hold this transaction should be treated as a contract of sale - Held that - The genuineness of the agreement of sale is not doubted by the Assessing Officer. Admittedly, the Respondent-Assessee Company is in the business of real estate. Therefore, the lands which were proposed to be sold were shown / treated as stock-in-trade in the books of the Respondent- Assessee company. Therefore, the definition of term transfer as given in the provisions of sub-section (47) of Section 2 of the Act, has no application, because the definition is given in relation to capital asset, which is not clearly applicable to stock-in-trade. Therefore, the law applicable to the immovable property is to be considered to determine whether there is a sale or not. The Hon ble Apex Court in the cases of CIT vs. Bhurangya Coal Co. 1958 (9) TMI 2 - SUPREME Court and Alapati Venkatramiah 1965 (3) TMI 21 - SUPREME Court laid down that the transfer of immovable property was considered to have taken place upon conveyancing and not the date of agreement of sale. In the case on hand, undisputedly it was only an agreement of sale, which was entered into between the Respondent-Assessee Company and M/s. Leo Edibles & Fats Limited. No Sale Deed was either executed or registered. Therefore, applying the law laid down by the Hon ble Supreme Court in the above cases supra, it cannot be said that there is a sale of lands pursuant to the Agreement of Sale. Therefore, we concur with the order of the learned Commissioner of Income Tax (Appeals) and we do not want to interfere with the order of Commissioner of Income Tax (Appeals). Decided against revenue.

Summary

Issues Involved:
1. Erroneous order of the Commissioner of Income Tax (Appeals).
2. Accrual of the entire sale amount under the mercantile system of accounting.
3. Treatment of the agreement of sale as a contract of sale.
4. Previous ITAT decision relevance.

Issue-wise Detailed Analysis:

1. Erroneous Order of the Commissioner of Income Tax (Appeals):
The Revenue contended that the order of the Commissioner of Income Tax (Appeals) was erroneous both in law and in facts. The Commissioner had directed the Assessing Officer to re-examine the transactions in-depth, including summoning accountable persons and examining original documents. However, the Commissioner of Income Tax (Appeals) found that the Assessing Officer did not record cumulative findings to hold the transaction as a sale. The Commissioner of Income Tax (Appeals) determined that the agreement for sale of land could not be treated as a sale and taxed as business income unless a sale deed was executed and registered.

2. Accrual of the Entire Sale Amount under the Mercantile System of Accounting:
The Revenue argued that since the Respondent-Assessee Company followed the mercantile system of accounting, the entire sale amount should be considered accrued. However, the Commissioner of Income Tax (Appeals) found that the agreement of sale could not be equated with a development agreement, and no final transaction had taken place. The Commissioner noted that the property could only be considered sold when a sale deed was executed and registered.

3. Treatment of the Agreement of Sale as a Contract of Sale:
The Commissioner of Income Tax (Appeals) found that the agreement of sale dated 02.11.2005 with M/s. Leo Edibles and Fats Limited, where a sum of Rs. 36,55,000/- was received as an advance, did not constitute a sale. The Commissioner observed that the transaction could only be treated as a sale when the property was sold by executing a sale deed with possession and registration in the purchaser's name. The Commissioner also noted that the condition for reclassification of the land as 'industrial land' was not met, and the agreement was subsequently canceled on 27.03.2008.

4. Previous ITAT Decision Relevance:
The Revenue referenced a previous ITAT decision (ITA No.1080/Hyd/2011 dated 18.05.2012) that confirmed the Commissioner of Income Tax's action in revising the assessment order. However, the Commissioner of Income Tax (Appeals) found that the Assessing Officer did not follow the directions to make in-depth and specific inquiries, and thus, the addition of Rs. 79,27,913/- was not justified.

Conclusion:
The ITAT upheld the order of the Commissioner of Income Tax (Appeals), concluding that the agreement of sale did not constitute a sale under the mercantile system of accounting. The appeal filed by the Revenue was dismissed, affirming that no sale occurred without an executed and registered sale deed, and the addition made by the Assessing Officer was deleted.