2017 (12) TMI 1326 - AT - Income Tax

Nature of sale of flats - business income or capital gains - renting of unsold flats - sale of undivided shares of land to various flat buyers - Conversion of land into stock in trade by applying the provisions of section 45(2) - source of income of the assessee - Held that - The assessee has been offering the rental income for taxation. We also note that some of the flats, were sold by the assessee in subsequent years and the assessee offered the capital gain tax thereon. Therefore, reconvergence of stock in trade to capital assets as has been alleged by the Commissioner of Income Tax does not sustain in the eye of law, hence no enhancement is possible. We note that the main source of income of the assessee is from rental income (letting of flats), capital gains and income from other sources. In assessment year 2011-12, the assessee sold some flats and offered capital gain in the year of sale. Based on the above discussion it can be safely concluded that the assessee has not converted the land into stock in trade and the department has not adduced any evidence to prove that the land has converted into stock in trade and the Ld. CIT(A) has not adduced any evidence to prove for re-convergence of flats into stock in trade for capital assets, hence no enhancement is possible. The assessee as per the development agreement got some flats from the developer and rented (let out) them to earn the rental income and the same rental income is being offered by the assessee for taxation. Since the assessee offered the rental income for taxation, therefore, the Assessing Officer cannot bring the said land into the ambit of taxation by applying the provision of section 45(2) of the Act. Applicability of the provisions of Section 28(iv) in respect of the flats retained by the assessee in subsequent Assessment Years - Held that - Since we have already adjudicated the solitary grievance of the assessee, stating that provisions of section 45(2) of the Act does not apply to the assessee, hence this ground becomes infructuous and does not require adjudication.

Summary

Issues Involved:
1. Classification of transactions as business transactions.
2. Existence of a joint venture between the assessee and the developer.
3. Conversion of undivided shares of land into stock-in-trade under section 45(2).
4. Applicability of Section 28(iv) for flats retained by the assessee.
5. Enhancement of income by the CIT(A).

Detailed Analysis:

1. Classification of Transactions as Business Transactions:
The assessee contended that the transactions related to the sale of undivided shares of land to various flat buyers through the developer should not be classified as business transactions. The Commissioner of Income Tax (Appeals) held that the transactions constituted business, making the profits taxable under "Profits and Gains from Business or Profession." However, the Tribunal found that the assessee's land remained a capital asset and was not converted into stock-in-trade. The Tribunal emphasized that there was no positive act by the assessee to treat the land as stock-in-trade, thus rejecting the application of section 45(2).

2. Existence of a Joint Venture:
The assessee argued that there was no joint venture with the developer. The Tribunal noted that the developer was responsible for all construction activities and that the assessee had no say in the selection of buyers or pricing. The Tribunal concluded that the relationship between the assessee and the developer was not a joint venture but rather a contractual arrangement for the development and sale of flats.

3. Conversion of Undivided Shares of Land into Stock-in-Trade:
The Tribunal examined whether the assessee converted the land into stock-in-trade under section 45(2). The Tribunal found no evidence of such conversion, as the land remained a capital asset in the assessee's balance sheet. The Tribunal cited the Allahabad High Court's decision in Amrit Corp. Ltd. vs. Addl. CIT, which required a positive act for conversion. Since no such act was present, the Tribunal ruled that section 45(2) was not applicable.

4. Applicability of Section 28(iv) for Flats Retained by the Assessee:
The Tribunal addressed the applicability of Section 28(iv), which pertains to benefits arising from business. The Commissioner of Income Tax (Appeals) had applied this section, treating the cost of construction borne by the developer for the retained flats as business income. However, since the Tribunal ruled that section 45(2) did not apply, this ground became infructuous and did not require adjudication.

5. Enhancement of Income by the CIT(A):
The Commissioner of Income Tax (Appeals) enhanced the assessment by applying section 45(2) and computing capital gains and business income. The Tribunal found that the enhancement was based on the incorrect application of section 45(2). Since the Tribunal ruled that section 45(2) did not apply, the enhancement was invalid, and this ground also became infructuous.

Conclusion:
The Tribunal allowed the appeal, ruling that the provisions of section 45(2) did not apply to the assessee. Consequently, the grounds related to the applicability of section 28(iv) and the enhancement of income were rendered moot. The Tribunal emphasized the necessity of a positive act for the conversion of a capital asset into stock-in-trade, which was absent in this case. The appeal was allowed, and the order was pronounced on December 20, 2017.