2017 (6) TMI 232 - AT - Income Tax

Validity of revision order passed u/s 263 - taxability of capital gain arising on transfer of land upon entering into the development agreement - Principal CIT has taken the view that the two events resulting in generation of capital gains, viz., (a) conversion of capital asset into stock in trade and (b) transfer of such asset has been completed as per the provisions of sec. 2(47)(v)have been completed during the instant year - 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). 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. It cannot also be said that the AO has applied the provisions on an incorrect way or there was incomplete interpretation of the provisions, since the view taken by the AO is a possible view. Hence CIT has assumed jurisdiction u/s 263 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. Weighted deduction u/s 35(1)(ii)- Held that - We notice 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. Under these set of facts, we are of the view that the Ld Principal CIT was justified in invoking revision provisions on this issue. Appeal decided partly in favour of assessee.

Summary

Issues Involved:
1. Validity of the revision order passed under section 263 of the Act.
2. Taxability of capital gains on the conversion of capital assets into stock in trade.
3. Claim of weighted deduction under section 35(1)(ii) of the Act.

Detailed Analysis:

Validity of the Revision Order Passed Under Section 263:
The appeal challenges the validity of the revision order passed by the Principal CIT under section 263 of the Income Tax Act, 1961. The Principal CIT revised the assessment order, deeming it "erroneous and prejudicial to the interest of revenue." The Tribunal examined the legal position regarding the power of the Principal CIT to invoke revision proceedings under section 263. It referenced the judgments of the Hon'ble Bombay High Court and the Supreme Court, emphasizing that an order can only be revised if it is "erroneous in so far as it is prejudicial to the interests of the revenue."

Taxability of Capital Gains on Conversion of Capital Assets into Stock in Trade:
The Principal CIT argued that the assessee was liable to pay capital gains tax on the conversion of capital assets into stock in trade upon entering into a development agreement. The Principal CIT relied on section 2(47)(v) and the decision of the Hon'ble Bombay High Court in Chaturbhuj Dwarkadas Kapadia's case, which states that the transfer is deemed complete upon entering into a development agreement.

The assessee contended that as per section 45(2), capital gains tax arises only when the stock in trade is sold or transferred. The Tribunal agreed with the assessee, stating that section 2(47)(v) applies only to capital assets, not to stock in trade. The Tribunal found merit in the assessee's argument that the provisions of section 2(47)(v) would not apply since the asset was held as stock in trade and not as a capital asset. Furthermore, the Tribunal noted that the Principal CIT failed to disprove the assessee's claim that possession of the asset had not been given to the developer. Consequently, the Tribunal concluded that the AO had taken a possible view, and the Principal CIT failed to show that the tax lawfully exigible had not been imposed. Thus, the Tribunal set aside the order passed by the Principal CIT on this issue.

Claim of Weighted Deduction Under Section 35(1)(ii) of the Act:
The Principal CIT observed that the AO allowed the weighted deduction under section 35(1)(ii) without examining the compliance of the prescribed conditions. The Tribunal noted that the AO indeed failed to examine this claim. Given that the weighted deduction requires compliance with certain conditions, the Tribunal upheld the Principal CIT's invocation of revision provisions on this issue.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee. It set aside the order of the Principal CIT regarding the taxability of capital gains on the conversion of capital assets into stock in trade but upheld the revision order concerning the claim of weighted deduction under section 35(1)(ii). The stay application filed by the assessee was dismissed as infructuous.