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2017 (11) TMI 1958 - AT - Income TaxCapital gain computation - valuation of land adopted by the AO without directing the AO to refer the matter to DVO - deduction of fair market value as on 01.04.1981 - HELD THAT - Admittedly during the year under consideration had converted his agricultural land into stock in trade and had also entered into development agreement with the said developer for development of the said project. The first step which assessee had taken is conversion of land into stock in trade which is deemed transfer as per Section 45(2) of the Act. However the capital gains arising on such transfer on conversion of agricultural land into stock in trade would only arise in the year in which the said asset i.e. stock in trade is sold or otherwise transferred by him i.e. either asset is sold or developed and thereafter sold. In the present case assessee has entered into a development agreement of said land and as per agreement to receive 37% of the sale receipts as his share. Admittedly till 31.03.2010 even the municipal sanction of the plans for the said land for development had not been received by assessee or the said developer. Hence the property i.e. stock in trade was not even ready for development. CIT(A) referred to the provision of Section 45(2) of the Act but goes on to say since the assessee has declared income from capital gains then the same may be assessed in the hands of the assessee. However such assessment made in the hands of the assessee is against provision of the Act especially with reference to Section 45(2) of the Act. In view thereof we find no merit in the findings of CIT(A) in this regard Deduction u/s. 54B(1) and 54B(2) - Since the assessee would be liable to pay tax on the capital gain only when the stock in trade is sold or otherwise transferred by him. Then the question which arises is whether entering into development agreement by the assessee would result in otherwise transferring of the said land by the assessee. We find no merit in the same and hold that the deemed transfer as envisaged under Section 45(2) of the Act would arise only when stock in trade is sold or otherwise transferred by him and not in the year in which he converted his asset into stock in trade and further entered into development agreement for development of the said land. There is no merit in the findings of CIT(A) and the assessee s entitlement for claiming deduction u/s. 54B(1) and 54B(2) of the Act would be seen in the year in which the deemed transfer is to be taxed in the hands of the assessee. Cost of acquisition as on 01.04.1981 in the hands of the assessee while computing long term capital gain on conversion of agricultural land into stock in trade i.e. deemed transfer - In the present facts of the case Assessing Officer was of the view that value declared as on 01.04.1981 was higher than the value as on that date. In such circumstances the provision of Section 55A(1) of the Act cannot invoke. In this regard we find support in the ratio laid down by the Hon ble Bombay High Court in the case of CIT Vs. Puja Prints 2014 (1) TMI 764 - BOMBAY HIGH COURT where it was held that no reference could be made u/s. 55A(1) of the Act to determine fair market value of the property as on 01.04.1981 on the ground value declared by assessee was high. The Hon ble High Court further held that the amendment brought in by Finance Act 2012 was prospective. Thus we hold that there is no merit in the stand of Assessing Officer in adopting value in ad-hoc manner. Accordingly we hold so. Thus the order of CIT(A) is confirmed on the first issue and is reversed on the second issue. Hence grounds of appeal of the revenue are partly allowed.
Issues Involved:
1. Rejection of valuation of land adopted by the AO without referring the matter to DVO. 2. Allowance of deduction claimed by the assessee under Section 54B(1) & 54B(2) of the Income Tax Act, 1961. 3. Applicability of the amendment to Section 55A of the Act. 4. Non-remand by CIT(A) to refer the valuation matter to DVO. 5. Due date for filing the return under Section 139(1) of the Act. 6. Interpretation of sales/receipts/turnover and liability for audit under Section 44AB. 7. Interpretation of provisions of Section 45(2) of the Act. 8. Taxability of the security deposit as business income. 9. Rejection of valuation report and adoption of valuation without reference to the Valuation Officer. 10. Claim of deduction under Section 54B for investment in agricultural land and deposit in capital gain deposit scheme. Issue-wise Detailed Analysis: 1. Rejection of Valuation of Land: The CIT(A) rejected the valuation of land adopted by the AO without directing the AO to refer the matter to the DVO. The AO had estimated the value of the assessee’s agricultural land at Rs. 50,000/- without any proper basis, disregarding the valuation report provided by the registered valuer. 2. Allowance of Deduction under Section 54B(1) & 54B(2): The CIT(A) allowed the deduction claimed by the assessee under Section 54B(1) & 54B(2) of the Act. The assessee had converted agricultural land into a business asset and entered into a joint venture for development. The AO denied the deduction on the grounds that the land was not under cultivation for the required period and the investment was made after the due date for filing the return. 3. Applicability of Amendment to Section 55A: The CIT(A) held that the amendment to Section 55A, effective from 01/07/2012, is prospective and cannot be applied to the assessment year 2010-11. The AO’s argument that the amendment was applicable because the assessment proceedings concluded after the amendment date was rejected. 4. Non-remand by CIT(A) to Refer Valuation Matter to DVO: The CIT(A) did not remand the matter to the AO to refer the valuation to the DVO, holding that the AO’s estimation was arbitrary and without basis. 5. Due Date for Filing Return: The AO argued that the due date for filing the return was 31/07/2010, and the assessee was not covered under Section 44AB. The CIT(A) considered the evidence of agricultural operations and concluded that the assessee was cultivating the land for many years before the sale date. 6. Interpretation of Sales/Receipts/Turnover and Audit Liability under Section 44AB: The AO contended that the assessee had shown NIL income from business and professions, and sales/receipts were NIL. The CIT(A) held that work-in-progress (WIP) in the previous year, which may result in future profits, constitutes sales/receipts/turnover. 7. Interpretation of Section 45(2): The CIT(A) interpreted that on conversion of a capital asset into stock-in-trade, the date of conversion is treated as a transfer, but the assessee is liable to pay tax on capital gain only when there is a sale. The AO’s view that the capital gain should be taxed in the year of conversion was rejected. 8. Taxability of Security Deposit as Business Income: The CIT(A) concluded that the security deposit of Rs. 50,00,000/- received from the developer was not business receipts taxable in the hands of the assessee during the previous year. The income would arise when receipts from the sale of flats started coming in. 9. Rejection of Valuation Report and Adoption of Valuation without Reference to Valuation Officer: The CIT(A) noted that the AO arbitrarily adopted a rate of Rs. 10,000/- per acre without any supporting justification, disregarding the registered valuer’s report. The CIT(A) held that the AO should have referred the matter to the DVO as per Section 55A of the Act. 10. Claim of Deduction under Section 54B: The CIT(A) allowed the assessee’s claim of deduction for investment in agricultural land and deposit in the capital gain deposit scheme. The CIT(A) observed that the investment was made within the stipulated time frame, and the assessee had furnished sufficient evidence of agricultural activities. Conclusion: The Tribunal partly allowed the Revenue’s appeal, confirming the CIT(A)’s order on the valuation issue and reversing the CIT(A)’s order on the deduction claims under Section 54B. The Tribunal held that the deemed transfer under Section 45(2) would arise only when the stock-in-trade is sold or otherwise transferred, not in the year of conversion. The Tribunal found no merit in the AO’s ad-hoc valuation and confirmed the CIT(A)’s rejection of the AO’s valuation method.
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