2017 (5) TMI 1273 - AT - Income Tax

Revision u/s 263 - taxability of capital gain - whether provisions of sec. 2(47)(v) would be applicable to the impugned transaction of development of a land held as stock in trade - Held that - Ld Principal CIT has failed to show that the tax which was lawfully exigible has not been imposed, since we are of the view that there is merit in the contention of the assessee that the provisions of sec. 2(47)(v) will not apply to an asset held as Stock in trade , since the said provision very clearly states that it would apply only to Capital assets , i.e., the asset should have been held as Capital asset. Further it is the submission of the assessee that the possession of the asset has not been given to the developer, which is the main condition for applying the provisions of sec. 2(47)(v) of the Act. We notice that the Ld Principal CIT has failed disprove the said claim of the assessee. Hence, in our view, the AO has taken a possible view in this matter and further the Ld Principal CIT has failed to show that the tax which was lawfully exigible has not been imposed. Ld Principal CIT has assumed jurisdiction u/s 263 of the Act on this issue without properly complying with the mandate of the section, i.e., he has failed to show that the assessment order was erroneous on this issue causing prejudice to the revenue. Accordingly we set aside the order passed by Ld Principal CIT on this issue. - Decided in favour of assessee Weighted deduction u/s 35(1)(ii) - Held that - The assessing officer has failed to examine the same at all. Further the Ld Principal CIT has also observed that the weighted deduction is allowed upon compliance of certain conditions, which require examination. Ld Principal CIT was justified in invoking revision provisions on this issue.- Decided against assessee

Summary

Issues Involved:
1. Validity of the revision order passed by Principal CIT under section 263 of the Income Tax Act.
2. Taxability of capital gains on the conversion of a capital asset into stock in trade.
3. Allowance of weighted deduction under section 35(1)(ii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Revision Order Passed by Principal CIT under Section 263:
The assessee challenged the revision order dated 22.3.2016 passed by the Principal CIT-12, Mumbai, under section 263 of the Income Tax Act, which revised the assessment order passed by the Assessing Officer (AO) under section 143(3) for the Assessment Year (A.Y.) 2011-12. The Principal CIT held that the AO's order was erroneous and prejudicial to the interest of revenue. The assessee argued that the AO had examined the issues in question and had taken a possible view, which should not be revised simply because the Principal CIT disagreed with it.

2. Taxability of Capital Gains on Conversion of Capital Asset into Stock in Trade:
The Principal CIT held that the assessee was liable to pay capital gains tax on the conversion of a capital asset into stock in trade, as the transfer was completed upon entering into a development agreement. The Principal CIT relied on section 2(47)(v) of the Act and the decision in Chaturbhuj Dwarkadas Kapadia (260 ITR 491). The assessee contended that, as per section 45(2), capital gains tax liability arises only when the stock in trade is sold or transferred, not at the time of conversion. The assessee also argued that the development agreement only granted a license to the developer and did not transfer any asset, making the provisions of section 2(47)(v) inapplicable.

The Tribunal found merit in the assessee's contentions, noting that section 45(2) clearly states that capital gains tax is chargeable in the year the stock in trade is sold. The Tribunal also agreed that section 2(47)(v) applies only to capital assets, not stock in trade. Therefore, the AO's view was a possible one, and the Principal CIT failed to show that the tax lawfully exigible was not imposed. Consequently, the Tribunal set aside the Principal CIT's order on this issue.

3. Allowance of Weighted Deduction under Section 35(1)(ii):
The Principal CIT observed that the AO allowed the assessee's claim for weighted deduction under section 35(1)(ii) without examining the compliance of the prescribed conditions. The assessee had donated ?70 lakhs to M/s ASPEE Agricultural Research and Development Foundation and claimed a weighted deduction of ?1,22,50,000. The Tribunal noted that the AO had failed to examine this claim, and the Principal CIT was justified in invoking revision provisions on this issue.

Conclusion:
The Tribunal partly allowed the assessee's appeal, setting aside the Principal CIT's order regarding the taxability of capital gains on the conversion of a capital asset into stock in trade. However, it upheld the Principal CIT's order concerning the allowance of weighted deduction under section 35(1)(ii). The stay application filed by the assessee was dismissed as infructuous.