2019 (4) TMI 852 - AT - Income Tax

Revision u/s 263 - whether the assessment order was erroneous and also prejudicial to the interests of the Revenue? - HELD THAT - Not inclined to accept or adjudicate this contention of the assessee at this stage for the simple reason that the said question is pending adjudication before the CIT(A) and if it is held to be not sustainable, then the order u/s 263 also would not be sustainable as the very basis would have been knocked down. Therefore, it cannot be said that the assessment itself is a protective assessment. Therefore, the first objection of the assessee is not adjudicated at this stage. SCN related to taxability of capital gain on GDA relating to Stock -in- trade - in the year of executed the sale deed transferring the stock-in-trade or when stock-in-trade given for joint development to the builder - HELD THAT - From the judgments in DHEERAJ AMIN VERSUS ACIT 2014 (6) TMI 1017 - ITAT BANGALORE & WIPRO LTD. VERSUS DCIT 2015 (10) TMI 826 - KARNATAKA HIGH COURT it is clear that the stockin- trade can be considered as transferred only in the year in which the assessee has executed the sale deed transferring the stock-in-trade and not when the assessee has given stock-in-trade for joint development to the builder. As already held in the above cases, the provisions of section 2(47)(v) would apply only to the capital asset and not to stock-in-trade. We find that the stock-in-trade cannot be considered as transferred in the relevant financial year and therefore, the assessment order cannot be considered to be prejudicial to the interest of the Revenue. Therefore, since of the twin conditions for initiating and also passing of an order u/s 263 is not satisfied and the first ground on which the assessment order has been revised is not sustainable, the CIT order u/s 263 has to be set aside on this ground alone. SCN related to taxability of unsold flats - assessee has received 24 flats from M/s. D.M. Builders and 2 flats were left unsold - amendment introduced by the Finance Act, 2017 w.e.f. 1/4/2018 regarding taxability of notional rent on the two unsold flats - HELD THAT - When the assessment order was passed on 31.03.2016 when the relevant provision has not even been brought into statute book. The AO cannot be expected to apply the same. Therefore, on this account also, the assessment order cannot be said to be erroneous and prejudicial to the interest of the Revenue. Therefore, we set aside the order of the CIT u/s 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the protective assessment.
2. Applicability of Section 45(2) for capital gains on conversion of capital asset to stock-in-trade.
3. Taxability of business income from Joint Development Agreement (JDA).
4. Taxability of notional rent on unsold flats.

Detailed Analysis:

1. Validity of the Protective Assessment:
The assessee argued that the assessment order was a protective assessment and cannot be revised under Section 263. The AO's observation that the substantive demand is less than the admitted income and the entire payment is kept in abeyance as a protective assessment was cited. However, the Tribunal did not adjudicate this contention as it is pending before the CIT(A). If the assessment is held to be not sustainable, the order under Section 263 would also not be sustainable.

2. Applicability of Section 45(2) for Capital Gains on Conversion of Capital Asset to Stock-in-Trade:
The CIT held that the capital gain arose in the relevant A.Y because the assessee entered into a JDA with M/s. Sri Sai Developers after converting the land from a capital asset to stock-in-trade. According to Section 45(2), capital gains are taxable in the year the stock-in-trade is transferred. The Tribunal referred to several judgments, including those of the Coordinate Bench and the Hon'ble Karnataka High Court, which clarified that stock-in-trade is considered transferred only when the sale deed is executed and not when given for joint development. Therefore, the assessment order was not prejudicial to the interest of the Revenue on this ground.

3. Taxability of Business Income from Joint Development Agreement (JDA):
The CIT directed that the business income on account of JDA should be taxed in the A.Y 2013-14, following the mercantile system of accounting. However, the Tribunal found that since the stock-in-trade is not considered transferred in the relevant financial year, the business income on an accrual basis also cannot be brought to tax in the A.Y 2013-14.

4. Taxability of Notional Rent on Unsold Flats:
The CIT held that the income from house property on vacant flats received from M/s. D.M. Builders should be taxed. The assessee contended that 22 out of 24 flats were sold in 2013, and the notional interest on the two unsold flats can be brought to tax only from 1/4/2018, as per the Finance Act, 2017. The Tribunal agreed, stating that the liability introduced by the Finance Act, 2017 is prospective and cannot be applied retrospectively. Therefore, the assessment order was not erroneous or prejudicial to the interest of the Revenue on this account.

Conclusion:
The Tribunal found that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The CIT's order under Section 263 was set aside, and the assessee's appeal was allowed.