2018 (2) TMI 2028 - AT - Income Tax

Capital gain on sale of land - Conversion of land - admissible deduction u/s 54 - HELD THAT - We find that the agricultural land initially purchased in year 1996 was converted and the land use changed to resort purposes in year 2002 and necessary approval sought from Nagar Vikas Niyas, Alwar. Thereafter, the said resort land was used for marriage and social functions under the name of Georgia Resorts. In year 2009, the assessee again got the land use changed from resort to residential and necessary approval sought from Nagar Vikas Niyas, Alwar which vide its order dated 31.7.2009 has approved the change of the land use to residential. Thereafter, the assessee had taken a series of steps whereby he has got the plans approved for carving out 20 plots of land, carried out various development activities and sold the residential plots to individual purchasers over a period of time. During AY 2010-11, as per admitted position by the assessee, he sold 3 plots of land. Thereafter, during AY 2011-12, he sold 1 plot of land and in the year under consideration, he sold 5 plots of land and sale deeds duly executed and assessed by stamp valuation authorities. All these facts taken together shows clearly that the assessee has taken affirmative steps and actions where he has got the land use changed to residential and converted his resort land into residential stock-in-trade of his business of selling the plots of land for earning profit. The very nature and purpose of the resort land has been changed and such change is an irreversible change where very nature and purpose of the land has been changed from resort to residential. It is not a case that the buyers have acquired resort plots and subsequently changed it to residential use. In this case, the assessee itself has sought land use conversion and developed residential plots and then sold it to individual buyers as residential plots. Therefore, we are of the view that by such plotting of land, the resort land has been converted into stock-in-trade (in form of residential plots) of assessee s business. The development of residential plots and said conversion has happened by assessee s own admission during financial year 2009-10 and the intent of the assessee has thus been demonstrated through his own deeds and actions. The fair market value of the asset on the date of conversion as reduced by the cost of acquisition and improvement/development expenses as claimed to have been incurred, is required to be assessed under the head capital gain in the year(s) the stock-in-trade is sold/transferred. Further, sales realization of the stock-in-trade over such fair market value is required to be assessed as business income . During the year under consideration, it is an admitted position that 5 plots have been sold for a consideration of ₹ 97,16,600. Therefore, the taxability arising on conversion of resort land into stock-in-trade to the extent the latter has been sold during the year, arises during the impunged assessment year. The matter is accordingly set-aside to the file of the AO to determine the capital gains in accordance with the provisions of section 45(2) as well as business income on sale of such plots. Further, the matter relating to allowability of development expenses and claim of deduction u/s 54 is also set aside to the file of the AO who shall examine the same and allow as per law.

Summary

Issues Involved:
1. Non-application of the previous CIT(A) order for AY 2010-11.
2. Classification of income from the sale of plots as business income versus capital gains.
3. Denial of deduction under Section 54.
4. Denial of indexation benefit on development and other expenses.

Detailed Analysis:

1. Non-application of the Previous CIT(A) Order for AY 2010-11:
The appellant argued that the CIT(A) erred in not following the decision of the CIT(A) for AY 2010-11, where similar facts were considered, and the income from the sale of plots was treated as capital gains. The principle of finality in legal proceedings, as emphasized by the Supreme Court in Radhasaomi Satsang vs. CIT, was cited to argue that the appellate authorities should respect the orders of other authorities in the same hierarchy.

2. Classification of Income from Sale of Plots:
The primary issue was whether the income from the sale of plots should be classified as business income or capital gains. The appellant purchased agricultural land in 1996, used it for agricultural purposes until 2005, and later converted it to a resort and then to residential plots. The CIT(A) for AY 2010-11 had previously ruled that the income from the sale of plots should be treated as capital gains. However, the CIT(A) for the current year, relying on the Supreme Court's decision in G. Venkatas Swami Naidu vs. CIT, held that the transactions were an adventure in the nature of trade, thus classifying the income as business income.

The Tribunal noted that the CIT(A) for the current year did not consider the impact of Section 45(2) of the Income Tax Act, which deals with the conversion of capital assets into stock-in-trade. The Tribunal highlighted that the intention at the time of purchase is less relevant than the intention at the time of conversion. The Tribunal cited several cases, including Octavius Steel & Co Ltd vs. ACIT and Rajendra Kumar Dwivedi, to support the application of Section 45(2), which taxes the fair market value of the asset at the time of conversion as capital gains and the subsequent sale proceeds as business income.

3. Denial of Deduction Under Section 54:
The appellant claimed a deduction of ?20 lakhs under Section 54, which was denied by the AO and upheld by the CIT(A). The Tribunal set aside this matter to the AO for re-examination in light of the correct classification of the income.

4. Denial of Indexation Benefit on Development and Other Expenses:
The appellant claimed indexation benefits on development and other expenses amounting to ?16,17,418/-. The CIT(A) upheld the AO's denial of this benefit. The Tribunal directed the AO to re-examine this claim in conjunction with the re-determination of the capital gains and business income.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, setting aside the matter to the AO to re-determine the capital gains and business income in accordance with Section 45(2) of the Income Tax Act and to re-examine the claims for deduction under Section 54 and indexation benefits on development expenses. The Tribunal emphasized that the fair market value at the time of conversion should be considered for capital gains, and the subsequent sale proceeds should be treated as business income.