2017 (4) TMI 654 - AT - Income Tax

Addition on account of capital gain for conversion of capital asset into stock entry - Held that - It is not in dispute that the capital asset has been converted into stock-in-trade by the assessee. The limited issue under dispute relates to the date of actual conversion of capital asset into stock-in-trade. The balance sheet date reflects the position as on the year-end and the said date cannot be taken as date of conversion unless the conversion or treatment of the capital asset into stock-in-trade has happened on the said date. The undisputed facts are that conversion or treatment of the capital asset into stock-in-trade has not happened on 31.03.2006. The ld. CIT(A) after into consideration the signing of the development agreement on 8.01.2005, Board Resolution dated 9.4.2005 and accounting entry passed by the assessee in its books of account on 10.04.2005 has rightly held that the date of conversion of capital asset into stock-in-trade should be taken as 10.4.2005. Accordingly, we do not find any infirmity in the order of the ld.CIT(A) which is hereby confirmed. Addition on account of trading/business profit - Held that - CIT(A) has held that it is not correct to hold that the proportion in which the sale proceeds are to be divided between the assessee and the developer should be considered and the land cost to be divided in the same proportion. Accordingly, the action of the AO was held not justified by the ld CIT(A) and it was held that the business profit for the appellant cannot be computed by just allowing 18% of the land cost as its expenses. We agree with the said findings of the ld. CIT(A) that the profit sharing ratio of the sale proceeds should not be a basis to limit the proportion of land cost in the hands of the assessee. It is undisputed fact that the assessee has contributed whole of its land which has subsequently been developed by developer who is responsible for the construction and development of the project including sales thereof. The profits that has to be computed in the hands of the assessee should therefore take into consideration the whole of land cost in hands of the assessee. It is unclear how the sale proceeds have been determined by the assessee and what was the corresponding DLC rate prevailing at that point of time and the reasons for the variance. It is also unclear how the profit sharing ratio of 18 82 has been determined between the assessee and the developer in terms of the development agreement executed on 8.1.2005. Further, it is unclear how the ld. CIT(A) while upholding the observations of the AO regarding the sales realization and profit sharing ratio has estimated the business profit at ₹ 2 lacs for AY 2007-08. In our view, the matter requires a fresh examination and we deem it fit to restore it back to the file of the ld. CIT(A) to examine the same afresh taking into consideration the above discussions. In the result, ground No. 2 of the revenue is allowed for statistical purposes. In the result, appeal of the revenue is party allowed for statistical purposes.

Summary

Issues involved:
1. Challenge to deletion of addition of capital gain for conversion of capital asset into stock-in-trade.
2. Challenge to deletion of addition of trading profit.

Analysis:

Issue 1: Challenge to deletion of addition of capital gain for conversion of capital asset into stock-in-trade

The Revenue challenged the deletion of the addition of capital gain for the conversion of a capital asset into stock-in-trade. The Assessing Officer applied the DLC rate to calculate the Fair Market Value (FMV) for computing capital gains. However, the CIT(A) disagreed, stating that the FMV should be determined on the date of conversion, not on the balance sheet date. The CIT(A) noted the Board resolution confirming the conversion of the land into stock-in-trade on 10.4.2005, not on 31.3.2006 as assumed by the AO. The CIT(A) held that the conversion date should be considered as 10.4.2005 based on the Board resolution and other evidence. The Tribunal upheld the CIT(A)'s decision, emphasizing that the balance sheet date does not indicate the conversion date, and confirmed the deletion of the addition of capital gain.

Issue 2: Challenge to deletion of addition of trading profit

Regarding the deletion of trading profit addition, the Assessing Officer disagreed with the profit-sharing ratio and considered the sale rate lower than the DLC rate. The CIT(A) found the AO's basis unjustified, stating that the profit-sharing ratio should not limit the proportion of land cost in the assessee's hands. The Tribunal agreed with the CIT(A) that the profit computation should consider the entire land cost in the assessee's hands. However, the Tribunal noted discrepancies in determining the sale proceeds, profit-sharing ratio, and estimated business profit. As a result, the Tribunal set aside the issue for reconsideration by the CIT(A) in line with relevant legal principles. Thus, the appeal on this ground was allowed for statistical purposes.

In conclusion, the ITAT Jaipur upheld the CIT(A)'s decision to delete the additions of capital gain and partially allowed the appeal on the trading profit issue for further assessment. The judgment provides detailed reasoning based on legal provisions and factual evidence, ensuring a fair and thorough analysis of the issues raised by the Revenue.