2016 (12) TMI 951 - AT - Income Tax

Revision u/s 263 - sale of land - AO treated sale as business receipt - The records shows that the assessee had purchased the land measuring 61,500 Sq. meter. The magnitude was so much that it cannot be for capital investment. The assessee got the land use conversion from agriculture to residential and paid the necessary fee to the concerned authorities. Since the acquisition of the said land and converting the same into residential was shown in the accounts as stock in trade which is evident from the financial statements available in the paper book as submitted before the AO. Further it is seen that ld. Pr.CIT- 1 has also observed the fact that as on 1-4-2009 the land was disclosed as opening stock for F.Y. 2009-10 i.e. relevant to AY 2010-11. The issue before us is for AY 2011-12. Thus in the previous year relevant to the assessment year before us the subject land was business asset of the assessee. The ld. Pr.CIT-1 has also ignored this fact. This issue has been examined by the AO and assessee had made submission during the course of assessment proceedings. These details are available in the paper book. The AO after examining these details and after going through these financial statements proceeded to complete the assessment by accepting the business profit declared by the assessee. The assessee has been able to demonstrate that the land sold during the assessment year was the business asset (stock in trade) in the financial statements and duly appearing in the return of income filed. The AO accepted the contentions of the assessee and adopted a view. Now Pr. CIT does not agree with the view adopted by the AO then the law does not permit him to replace the view. Thus in our considered view the ld. Pr.CIT-1 is not justified to set aside the order of the AO. Date of conversion of the investment in the subject land to the stock in trade - Held that - As established that there was no loss to revenue if the provisions of section 45(2) are applied and deemed capital gains as on the date of conversion of investment into stock in trade was computed. Further business profit is computed in the impugned year when actual sale takes place by taking the fair market value as on the date of such conversion as cost of acquisition. This view is duly supported by the order of the Hon ble Apex court in the case of CIT v. Max India Ltd.,(2007 (11) TMI 12 - Supreme Court of India ) wherein it has been held that every loss of revenue cannot be said to be prejudicial to the interests of revenue . As observed above in the present case , there has been no loss to the revenue and it cannot be said that the order passed by the AO was prejudicial to the interest of revenue - Decided in favour of assessee

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961.
2. Classification of land as stock-in-trade versus capital asset.
3. Applicability of Section 50C of the Income Tax Act, 1961.
4. Validity of the assessment order passed under Section 143(3) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961:
The assessee challenged the jurisdiction of the Pr. CIT to pass an order under Section 263, arguing that the Pr. CIT failed to establish how the assessment order was erroneous and prejudicial to the interests of the revenue. The assessee contended that the assessment order was passed after due inquiries and that the AO had accepted the explanation provided. The Tribunal observed that for invoking Section 263, the twin conditions of the order being erroneous and prejudicial to the interests of the revenue must be satisfied. The Tribunal found that the AO had made the necessary inquiries and that the Pr. CIT merely disagreed with the AO's conclusion, which is not sufficient to invoke Section 263.

2. Classification of Land as Stock-in-Trade versus Capital Asset:
The core issue was whether the land sold by the assessee was to be treated as stock-in-trade or a capital asset. The assessee argued that the land was purchased as part of its real estate business and was held as stock-in-trade, as reflected in the balance sheets for previous years. The Tribunal noted that the land was shown as stock-in-trade in the financial statements and that the assessee had incurred expenses for converting the land use from agricultural to residential, indicating a business intention. The Tribunal accepted the assessee's contention that the land was held as stock-in-trade and not as a capital asset.

3. Applicability of Section 50C of the Income Tax Act, 1961:
The Pr. CIT applied Section 50C, which deals with the valuation of capital assets for stamp duty purposes, arguing that the sale consideration should be replaced by the value determined by the stamp authorities. The assessee contended that Section 50C was not applicable as the land was stock-in-trade. The Tribunal agreed with the assessee, stating that Section 50C applies to capital assets and not to stock-in-trade. The Tribunal further noted that the AO had accepted the land as stock-in-trade and computed the business income accordingly.

4. Validity of the Assessment Order Passed under Section 143(3) of the Income Tax Act, 1961:
The Pr. CIT set aside the assessment order, claiming it was erroneous and prejudicial to the interests of the revenue. The assessee argued that the AO had conducted proper inquiries and that the assessment order was neither erroneous nor prejudicial to the revenue. The Tribunal found that the AO had indeed made necessary inquiries and that the Pr. CIT's order was based on a mere change of opinion. The Tribunal also considered the alternate argument that even if the land was treated as a capital asset, the provisions of Section 45(2) would apply, resulting in no loss to the revenue. The Tribunal concluded that the assessment order was valid and set aside the Pr. CIT's revision order.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the revision order passed by the Pr. CIT and restoring the assessment order passed under Section 143(3). The Tribunal emphasized that the AO had made necessary inquiries and that the Pr. CIT's order was based on a mere change of opinion, which is not sufficient to invoke Section 263. The Tribunal also agreed with the assessee's alternate argument regarding the applicability of Section 45(2), further supporting the conclusion that the assessment order was neither erroneous nor prejudicial to the interests of the revenue.

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