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2015 (5) TMI 1251 - AT - Income TaxDetermination of the head of income - profits arising from the transfer of lands as per the development agreements and sale of flats/bungalows allotted by the developer in lieu of or as consideration for transfer of land - intention behind the entire transaction on the part of the assessee - HELD THAT - In the present case, there was not only conversion by the assessee company of land held as capital asset till the date of development agreement into stock in trade, but there was also a change in the form of capital asset in as much as in lieu 73% of the land area, what the assessee company got on conversion was 27% of the total built up area of the project. The remaining 27% of the land area continued to be held by the assessee company, but as stock in trade on conversion. Thus, as a result of development agreement, there was conversion of capital asset into stock in trade as well as change in the form of asset in the sense that in place of 100% land area held as capital asset, the assessee company got 27% of the total built up area of the project alongwith proportionate undivided share in land as stock in trade, which became available to it for the purposes of dealing during the post development agreement period. We direct the AO to compute the income of the assessee form transfer of land held by the assessee company as capital asset by way of development agreement and subsequent sale of flats and bungalows received as consideration for such transfer which took the character of stock in trade on conversion in the manner and as per the method specified above, relying on the provisions of S.45(2). Change in the method of accounting followed by the assessee to recognize the income - Following our decision rendered in the case of M/s. Hill County Properties Ltd 2015 (5) TMI 930 - ITAT HYDERABAD we direct the AO to adopt the date of registration of agreement or possession of units as the date of sale of units for the purpose of computing the income of the assessee as per the provisions of section 45(2) of the Act.
Issues Involved:
1. Determination of the head of income under which profits from the transfer of land and sale of flats/bungalows are chargeable to tax. 2. Determination of the quantum of income chargeable to tax. 3. Applicability of Section 45(2) of the Income Tax Act for conversion of capital assets into stock in trade. 4. Change in the method of accounting for revenue recognition. 5. Levy of interest under Sections 234A and 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Determination of the Head of Income: The primary issue in these appeals is whether the profits from the transfer of land and subsequent sale of flats/bungalows should be taxed as "business income" or "capital gains." The assessee companies, including M/s. Goman Agro Farms Pvt. Ltd., acquired agricultural lands and entered into a development agreement with M/s. Maytas Properties Pvt. Ltd. The lands were pooled, and the developer constructed flats and bungalows, allocating 27% of the built-up area to the land-owning companies. The Assessing Officer (AO) and CIT(A) treated the income as business income, citing systematic planning and execution with the motive of earning profits. The AO noted that the companies were floated for real estate development, and the land was acquired with the intention of making a profit. The land was treated as stock in trade, and the activities were deemed an adventure in the nature of trade. However, the Tribunal found that the lands were initially held as capital assets, and the subsequent events did not change their nature. The intention at the time of acquisition was to carry on agricultural operations. Thus, the profits from the transfer of land as per the development agreement were chargeable to tax as capital gains, not business income. 2. Determination of the Quantum of Income: The AO computed the income by considering the entire transaction as a business venture and taxed the profits under the head "profits and gains of business or profession." The CIT(A) upheld this view, noting that the method of computation linked the income to the developer's profitability, indicating a business activity. The Tribunal directed the AO to compute the income by applying the provisions of Section 45(2) of the Income Tax Act, which deals with the conversion of capital assets into stock in trade. The fair market value of the land on the date of conversion was to be taken as the full value of consideration, and the capital gains were to be computed accordingly. The income from the sale of flats/bungalows was to be taxed as business income. 3. Applicability of Section 45(2): The assessee companies argued that the land was a capital asset converted into stock in trade on the date of the development agreement. The Tribunal accepted this contention, holding that the income arising from the transfer of land and subsequent sale of flats/bungalows should be computed as per Section 45(2). The fair market value of the land on the date of conversion was to be taken as the cost of construction of the built-up area received as consideration. 4. Change in the Method of Accounting: For the assessment year 2009-10, the assessee companies changed their method of revenue recognition, recognizing income only on the basis of registered agreements for sale or possession handed over. The AO rejected this change, but the CIT(A) upheld the AO's view. The Tribunal, following its decision in the case of the developer company, directed the AO to adopt the date of registration of agreements or possession of units as the date of sale for the purpose of computing income under Section 45(2). 5. Levy of Interest under Sections 234A and 234B: The issues relating to the levy of interest under Sections 234A and 234B were held to be consequential. The AO was directed to allow consequential relief based on the revised computation of income. Conclusion: The Tribunal partly allowed the appeals of the assessee companies, directing the AO to compute the income by applying the provisions of Section 45(2) and recognizing income on the basis of registration of agreements or possession of units. The appeals of the Revenue were dismissed as infructuous.
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