2018 (2) TMI 59 - HC - Income Tax

Capital gain computation - Determination of value of land - possession over land in dispute - transfer of land - Held that - What has been done in the case in hand is that ignoring the fact that Assessee did not have any title over land but possessed only lease rights and land was owned by State Government Revenue Authorities have proceeded to consider valuation assuming that Assessee had a right/title over land which is convertible into the manner Assessee liked and have proceeded accordingly. Lease land was converted by Assessee in stock in trade on 01.04.2003 i.e. Financial Year 2003-04 (A.Y. 2004-05). As is admitted land being Nazul owned by State Government and Assessee was only enjoying lease rights over the land the definition of capital asset includes within it lease rights over land since capital asset means property of any kind held by an Assessee but that will not extend to land itself. The term transfer in relation to a capital asset includes extinguishment of any right therein and conversion or treatment as stock in trade in business. Such conversion or treatment is defined under Section 2(47) but this conversion is only in relation to lease rights over land in question and not the title or ownership of land. That continued to be vested in State Government even in A.Y. 2004-05. In respect of capital gain over land in question thus occasion for computation would arise only when title is transferred by State Government i.e. ownership upon Assessee/lessee who held that land under a lease agreement of 1942 for a period of 30 years renewable upto 90 years. It is nobody s case that such transfer of property took place in the A.Y. 2004-05. Therefore transfer of land as such resulting in capital gain could not have been worked out in A.Y. 2004-05 in the manner as has been done by Assessee since it did not own land in A.Y. 2004-05. It has not come on record when Assessee got title of land after execution of freehold deed/sale deed from State Government. The Builder s agreement with respect to share in land and transfer of land under the impression that land itself has been converted into stock in trade is nothing but a colourable transaction and it amounts to fraud. Revision u/s 263 - Held that - The view taken by Tribunal cannot be sustained inasmuch A.O. having not examined the matter in correct perspective as discussed above it is a clear case where his order is erroneous and prejudicial to the interest of Revenue and therefore CIT has rightly exercised jurisdiction under Section 263 of Act 1961. - Decided in favour of Revenue.

Summary

Issues Involved:
1. Jurisdiction of Commissioner of Income Tax under Section 263 of the Income Tax Act.
2. Determination of fair market value of land as on 01.04.1981.
3. Validity of conversion of capital asset into stock-in-trade.
4. Applicability of doctrine of merger.
5. Rights of the assessee over the Nazul land and its implications on tax computations.

Issue-Wise Detailed Analysis:

1. Jurisdiction of Commissioner of Income Tax under Section 263:
The court examined whether the Commissioner of Income Tax (CIT) had sufficient material to exercise jurisdiction under Section 263 of the Income Tax Act. It was held that the Assessing Officer's (AO) view was erroneous and prejudicial to the interest of Revenue, thus justifying the CIT's action under Section 263. The Tribunal's decision to the contrary was set aside, and the matter was remanded to the AO for fresh examination.

2. Determination of Fair Market Value of Land as on 01.04.1981:
The court scrutinized the method used by the Registered Valuer and the AO to determine the fair market value of the land. The Registered Valuer's report, based on a 1985 auction, was found inadequate as it did not scale down the value to 1981. The AO's reliance on circle rates was also deemed inappropriate without expert valuation. The Tribunal's decision to remand the issue for fresh adjudication by the AO was upheld, directing the AO to refer the matter to the District Valuation Officer (DVO) for accurate valuation.

3. Validity of Conversion of Capital Asset into Stock-in-Trade:
The court analyzed the legality of converting lease rights over Nazul land into stock-in-trade. It was emphasized that the lease rights, not the land itself, constituted the capital asset. The conversion's validity hinged on whether the lease was renewed post-2002. If not renewed, the assessee's possession would be unauthorized, impacting the legitimacy of the conversion and subsequent transactions. The AO was instructed to verify the renewal status and reassess the transactions accordingly.

4. Applicability of Doctrine of Merger:
The court addressed whether the doctrine of merger applied when an appeal was withdrawn to pursue rectification under Section 154. It was concluded that the Tribunal erred by not addressing all grounds raised, particularly the applicability of the doctrine of merger. The AO was directed to consider the implications of the withdrawal and whether the assessee was left without a remedy against the assessment order.

5. Rights of the Assessee over Nazul Land and Its Implications:
The court extensively discussed the nature of Nazul land, emphasizing that it remains state-owned, with the lessee holding only lease rights. The implications of unauthorized possession post-lease expiry were highlighted, affecting the assessee's claim over the land as a capital asset or stock-in-trade. The AO was tasked with re-evaluating the assessee's rights and the resultant tax computations, considering the lease's status and the nature of Nazul land.

Conclusion:
The court remanded the matters to the AO for fresh examination of all aspects, including the validity of the lease, fair market value determination, and the nature of the assessee's rights over the Nazul land. The Tribunal's orders were set aside or modified to align with this directive, ensuring a comprehensive reassessment in light of the court's detailed analysis. The writ petition challenging the DVO's provisional valuation report was allowed, with the AO's authority to seek valuation reaffirmed.