2017 (5) TMI 1039 - AT - Income Tax

Income from sale of land - classification of the land in revenue records - whether it was agricultural land sold? - fixing value of land - Held that - AO has conclusively established that the lands sold by the assessee in the previous year relevant to the assessment year were not agricultural in nature, but, on the other hand, they are non-agricultural land. Therefore, it definitely comes under the category of capital asset . Further, the assessee has converted it into stock-in-trade and also the assessee during the financial year 2006-07, obtained NOC from Tahsildar, Sriperumpudur on 18.12.2006 and applied for plot approval from Chengalpet local authorities in the month of January,2007. The assessee received said approval for converting his land into housing plots on 06.02.2007 from Deputy Director of Urban Development and housing plot was developed and sold by assessee. When the basic nature of the land itself found to be nonagricultural, the arguments regarding status of the property, whether within metropolis or outside the limit of the metropolis, is irrelevant. A non-agricultural property, whether inside the municipality or outside the municipality or even in a remote village is a capital asset or stock-in-trade and transfer of the same may generate income liable for capital gains taxation or business income as the case may be. Regarding fixing the value as on 01.01.2007 by the CIT(A) at ₹ 53/- per sq. ft., which is based on the sale incidence of the property situated at Novaloor village located next to Nattarasampattu village vide Sale deed June, 2007 for 23,100/- per cent at ₹ 53/- sq. ft. In our opinion, when the assessee sold the property in the A.Y 2010-11 at ₹ 351 sq. ft., it cannot be said that the value of that property as on 01.04.2009 be at ₹ 53/- per sq. ft.. Considering the sale value at ₹ 351 sq. ft., we direct the AO to work out the value of opening stock as on 01.04.2009 by applying the reverse indexation method. Accordingly, this issue is remitted to the file of AO for his fresh consideration on this direction only. Disallowance of 10% value expenditure incurred - Held that - When the assessee has not produced the bills and vouchers, there is every chance of inflating the expenditure by the assessee. Accoridngly, we direct the AO to disallow at 5% instead of 10% of the total expenditure of ₹ 19,60,530/-. This ground is partly allowed for statistical purposes.

Issues Involved:
1. Jurisdiction of the Assessing Officer.
2. Valuation of stock-in-trade.
3. Classification of land as agricultural or non-agricultural.
4. Applicability of capital gains under Section 45(2) on conversion of agricultural land into stock-in-trade.
5. Disallowance of 10% of various expenditures.
6. Levy of interest under sections 234A, 234B, and 234C of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer:
The assessee contended that the order of the Assessing Officer (AO) was without jurisdiction. However, this issue was not elaborated upon in the judgment, and the focus was on other substantive matters.

2. Valuation of Stock-in-Trade:
The assessee valued the stock-in-trade at ?125 per sq.ft. as of 1.1.2007, claiming this was the market value at the time of conversion. The AO revalued the stock-in-trade at ?20 per sq.ft., resulting in an addition of ?8,48,484 as short-term capital gains. The CIT(A) later adjusted the valuation to ?53 per sq.ft. based on comparable sales. The Tribunal directed the AO to rework the value of the opening stock as of 1.4.2009 using the reverse indexation method.

3. Classification of Land as Agricultural or Non-Agricultural:
The core argument from the assessee was that the land was classified as agricultural in revenue records. However, the Tribunal noted that classification in revenue records alone does not conclusively determine the nature of the land. The Tahsildar's letter indicated no agricultural activities were carried out from 2006 to 2009, and the land was unsuitable for cultivation. The Tribunal concluded that the land was non-agricultural, thus, a "capital asset."

4. Applicability of Capital Gains under Section 45(2):
The assessee argued that capital gains did not arise on conversion of agricultural land into stock-in-trade. However, since the land was determined to be non-agricultural, the conversion did attract capital gains. The Tribunal held that the land was converted into stock-in-trade and subsequently sold, generating income liable for capital gains taxation or business income.

5. Disallowance of 10% of Various Expenditures:
The AO disallowed 10% of various expenditures due to the lack of bills and vouchers, amounting to ?1,96,953. The CIT(A) upheld this disallowance. The Tribunal, acknowledging the possibility of inflated expenses, reduced the disallowance to 5% of the total expenditure of ?19,60,530, resulting in a disallowance of ?98,026.

6. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee objected to the levy of interest under these sections. However, this issue was not specifically addressed in the judgment, and the Tribunal's decision focused on the other substantive issues raised.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to rework the valuation of the opening stock using reverse indexation and reducing the disallowance of expenditures from 10% to 5%. The judgment emphasized that the land was non-agricultural, thus subject to capital gains taxation upon conversion and sale.

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