2018 (12) TMI 457 - AT - Income Tax

Validity of reopening of assessment - assessee had not disclosed any capital gain on conversion of his capital asset into business asset in the relevant financial year - reasons to believe - Held that - The provisions of section 45(2) make it clear that even if there is conversion of capital asset into stock in trade, the capital gains shall arise to an assessee only in the year in which such converted stock in trade is sold. Admittedly the alleged stock in trade was not sold by the assessee in Asst Year 2007-08. It is not the case of the revenue also that any stock in trade was sold by the assessee in Asst Year 2007-08. Hence there cannot be any capital gains in Asst Year 2007-08 even on alleged conversion of capital asset into stock in trade. Hence we hold that the basis of reopening pursuant to reasons recorded, fails on all force of law. The reopening was made in the instant case based on incorrect assumption of facts by the AO. Even on merits, AO estimated the value of 5500 sq.yard of land at ₹ 5,50,00,000/- based on estimated value quoted by the DVO on an interim basis. The ld AO failed to appreciate that ultimately some portion of land was even held by the assessee. In any case, 5500 sq.yard of land was never sold in full by the assessee. The total value determined by the DVO at a later stage i.e during first appellate stage was fixed at ₹ 2,33,24,000/- for entire 5500 sq.yard of land. The ld CITA having agreed to the said consideration value for the purpose of computing capital gains at ₹ 34,87,820/- by considering full value of consideration figure at ₹ 2,33,24,000/-, made totally unwanted and irrelevant observations in his appellate order by observing that the assessee shall be liable for business income at ₹ 5,15,12,180/- ( 5,50,00,000 34,87,820) in the year in which land is sold. In any case on merits, we hold that the capital gains arise only in the year in which possession of the land was handed over to the developer pursuant to the provisions of section 2(47)(v) r.w.s. 53A of the Transfer of Property Act, 1882. Reliance in this regard is placed on the decision of Hon ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay vs CIT 2003 (2) TMI 62 - BOMBAY HIGH COURT Hence we hold that the reopening made by the AO based on absolute incorrect assumption of facts deserves to be quashed. - Decided in favour of assessee. Land held by the assessee or the shops - capital gains or business income - Held that - Admittedly the sanction of the building plan was obtained on 29.10.2007 and the possession of land (after retaining the land which was not the subject matter of development agreement) was handed over by the assessee to the developer in Asst Year 2008-09. This tantamounts to transfer u/s 2(47)(v) of the Act read with section 53A of the Transfer of Property Act, 1882 and capital gains, if any, on transfer of land, should be considered only in Asst Year 2008-09. Reliance in this regard is placed on Chaturbhuj Dwarkadas Kapadia of Bombay vs CIT 2003 (2) TMI 62 - BOMBAY HIGH COURT . We hold that pursuant to the development agreement dated 13.9.2006 and handing over of possession of land in Asst Year 2008-09 by the assessee to the developer, the developer has already been entitled to 50% superstructure portion together with ownership of land thereon in Asst Year 2008-09 itself. Title is already held with developer in Asst Year 2008-09 itself. The Transfer deeds executed on 17.11.2008 in respect of lands proportionate to 4 shops were only for betterment of existing title to the developer. Hence there cannot be any capital gains or business income in the hands of the assessee for Asst Year 2009-10 in respect of the land held by the assessee or the shops. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment for AY 2007-08.
2. Determination of capital gains for AY 2007-08.
3. Treatment of business income and long-term capital gains for AY 2009-10.

Detailed Analysis:

Issue 1: Validity of Reopening the Assessment for AY 2007-08
The assessee filed a return for AY 2007-08 declaring an income of ?1,43,510, which was processed under section 143(1) of the Income Tax Act, 1961. The assessment was later reopened by the Assessing Officer (AO) under section 147 on the grounds that the assessee did not disclose capital gains on the conversion of a capital asset into a business asset. The assessee responded to the notice under section 148 by stating that the original return should be treated as filed in response to the notice.

The Tribunal found that the reopening was based on an incorrect assumption that the assessee converted his capital asset into stock-in-trade in AY 2007-08. The development agreement specified that possession of the land would be handed over only after obtaining the sanction of the building plan, which occurred on 29.10.2007, falling in AY 2008-09. Thus, there was no transfer of the capital asset in AY 2007-08, and the reopening was quashed.

Issue 2: Determination of Capital Gains for AY 2007-08
The AO estimated the value of the land at ?5.5 crores based on a preliminary report from the District Valuation Officer (DVO) and determined that the assessee had long-term capital gains of ?3,51,63,820. The assessee contested this valuation and argued that the possession of the land was not handed over in AY 2007-08.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld that the development agreement dated 13.09.2006 amounted to a transfer, and determined the long-term capital gains at ?34,87,820 based on the final DVO report valuing the land at ?2,33,24,000. However, the Tribunal held that the transfer of possession occurred only in AY 2008-09, as per the development agreement and the sanctioned building plan. Therefore, no capital gains arose in AY 2007-08, and the grounds raised by the assessee were allowed.

Issue 3: Treatment of Business Income and Long-Term Capital Gains for AY 2009-10
The assessee entered into a development agreement for constructing a multi-storied building on ancestral land, agreeing to share 50% of the constructed portion with the developer. During AY 2009-10, the assessee executed transfer deeds for 4 shops to the developer, valued at ?53,20,000, and the AO added ?26,60,000 as undisclosed business income.

The CIT(A) directed the AO to compute long-term capital gains on the transfer of 253.33 sq. yards of land and deleted the addition of business income. The Tribunal concurred that there was no conversion of the capital asset into stock-in-trade and that the transfer of possession occurred in AY 2008-09. Consequently, there could be no capital gains or business income in AY 2009-10 related to the land or shops. The grounds raised by the assessee were allowed.

Conclusion:
Both the appeals of the assessee were allowed, quashing the reopening of the assessment for AY 2007-08 and determining that no capital gains or business income arose in AY 2007-08 and AY 2009-10, respectively. The Tribunal emphasized the importance of the actual transfer of possession and the correct application of legal provisions under sections 2(47)(v) and 45(2) of the Income Tax Act.