2018 (5) TMI 1648 - AT - Income Tax

Assessability of land sold by the assessee - nature of land - business income or capital gain - assessee submitted land had been converted into stock-in-trade from capital asset - application for getting the land as non-agricultural land for the purpose of carrying on the development on the said land - Held that - The agreement between the parties is to develop the project and sell tenements / flats to the prospective buyers. Reading the terms of agreement, it is clear that the terms have been agreed between the parties for developing the said plot of land and it is eventually sale to different buyers. In order to safeguard its interest, the assessee as owner of the plot of land had agreed to receive consideration in advance i.e. at the time when the amount is received in part but in advance by the developer. But the said amount received by the developer cannot crystallize the transaction of sale of different flats / tenements to the prospective buyers till the project is completed. The developer M/s. J.K.R. Builders has recognized the completion and sale of developed portion in assessment year 2011-12 and has offered the income to tax in the said year. Consequently, the business profits arising to the assessee were taxable in the hands of assessee in the year when the project was completed and tenements / flats were handed over to the prospective buyers. The year under appeal is the year when the assessee received advance which does not culminate any completion of transaction and assessability of the amount as business profits in the hands of assessee. Accordingly, we hold so. Since the amount is not assessable to tax as his business profits in the year under consideration, the capital gains arising on conversion of capital asset into stock-in-trade is also not to be taxed in the hands of assessee in the year under consideration but in the year in which the business profits are to be taxed. The assessee has offered the said income in assessment year 2011-12 as offered by the developer in assessment year 2011-12. The Revenue has opposed the said by pointing out that the developer had followed the project completion method, which is one of the method for recognizing the revenue. Said method which has been followed by the developer is one of recognizing accrual of income in the hands of builder. Accordingly, we find no merit in the stand of Revenue in this regard. As already held that the capital gains has to be worked out on the basis of fair market value of the property as on the date of conversion and not on the basis of market value of the property. Accordingly, grounds of appeal No.1 to 3 raised by the assessee are allowed.

Summary

Issues Involved:
1. Conversion of land to stock-in-trade.
2. Taxability of income as capital gains under section 45(2) of the Income Tax Act.
3. Treatment of advances received as business receipts.
4. Eligibility for deduction under section 80IB(10) of the Income Tax Act.
5. Liability to pay interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Conversion of Land to Stock-in-Trade:
The main issue revolves around the conversion of land into stock-in-trade by the assessee. The Revenue contended that the Commissioner of Income-tax (Appeals) erred in allowing the plea of the assessee regarding the conversion of land as stock-in-trade in the assessment year 2006-07 without proof, especially since no return of income was filed for that year. The CIT(A) accepted the conversion and held that the fair market value of the asset on the date of conversion should be considered for computing capital gains, not the stamp duty value.

2. Taxability of Income as Capital Gains under Section 45(2):
The Revenue argued that the CIT(A) wrongly allowed the income to be taxed as capital gains under section 45(2) of the Act, despite the assessee not being engaged in the business of Development and Construction. The CIT(A) concluded that the capital gains should be taxed in the year the stock-in-trade is sold or transferred, and the fair market value on the date of conversion should be used for calculation. The Tribunal upheld this view, dismissing the Revenue's appeal on this issue.

3. Treatment of Advances Received as Business Receipts:
The assessee challenged the addition made by the Assessing Officer, who treated the advances received from the developer as business receipts. The CIT(A) held that these receipts should be taxed in the years they were received (2008-09 and 2009-10), not in the year of the final sale. However, the Tribunal found that the advances were received as part of a development agreement and should not be taxed as business profits until the project was completed and the flats were handed over to the buyers. Therefore, the Tribunal ruled in favor of the assessee, stating that the business profits should be taxed in the year of project completion (2011-12).

4. Eligibility for Deduction under Section 80IB(10):
The assessee claimed eligibility for deduction under section 80IB(10), which was denied by the CIT(A) on the grounds that the assessee was not developing the property but merely a landowner. The CIT(A) also noted that the assessee did not file the requisite audit report. The Tribunal upheld this decision, confirming that the developer, not the landowner, was eligible for the deduction.

5. Liability to Pay Interest under Sections 234B and 234C:
The assessee contested the liability to pay interest under sections 234B and 234C of the Income Tax Act. The Tribunal did not specifically address this issue in the detailed analysis, but the overall outcome suggests that the primary focus was on the correct year of taxability for the business receipts and capital gains.

Conclusion:
The Tribunal ruled that the business profits and capital gains should be taxed in the year the project was completed (2011-12), not in the years the advances were received. The fair market value on the date of conversion should be used for calculating capital gains. The assessee was not eligible for deduction under section 80IB(10), and the appeal of the Revenue was dismissed, while the appeal of the assessee was partly allowed.