2019 (7) TMI 22 - AT - Income Tax

Assessment of income - bifurcation of income as business income capital gain - mistakenly assessee shown entire income as business income - sale of agricultural land kept as investment in earlier year after converted into stock-in-trade - HELD THAT - The first point which is to be kept in mind is that the investment in different plots of land have not been shown as stock in trade by assessee in earlier years and if that be so, then the gain arising therefrom cannot be assessed as business income. But the assessee has declared profits on sale of land as its business income. So the exercise of working fair market value as on the date of conversion into stock in trade and consequent capital gains to be assessed on the date of conversion and the business income to be assessed on the date of sale of stock in trade need to be computed and assessed in the hands of assessee. The assessee also claims that since it is the agricultural land which is converted into stock in trade, then capital gains is assessable u/s 45(2). This aspect also needs verification by Assessing Officer. Consequently, we remit this issue back to the file of Assessing Officer to carry out necessary verification Disallowance u/s 40A(3) - payments made for purchase of land before sub-registrar i.e. Govt. Authority on the ground that the said payments were not covered under the exceptions specified u/r 6DD of the I.T. Rules - HELD THAT - Admittedly, purchase price of various plots of land was paid before the Registering Authorities on different dates and none of the same fall within accounting period except the one on which the assessee had incurred loss. In such circumstances, where the amount of cash has been paid for purchasing plots of land in earlier years, then no disallowance can be made u/s 40A(3) during the year, as no such purchases were made during the year. In any case, purchase price has been paid before the Sub-Registrar and the transaction being genuine, there is no merit in making any disallowance u/s 40A(3). Accordingly, we reverse the order of CIT(A) in this regard and delete the addition made u/s 40A(3). Grounds of appeal raised by assessee are thus, allowed.

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income-tax Act, 1961.
2. Assessability of quantum of business income in respect of the sale of agricultural land.
3. Determination of income from long-term capital gains.

Issue-wise Detailed Analysis:

1. Disallowance under section 40A(3) of the Income-tax Act, 1961:
The primary issue raised by the assessee was the disallowance of ?26,46,185/- under section 40A(3) of the Act for payments made in cash for the purchase of land. The assessee argued that these payments were made to rural farmers who insisted on cash payments and were not prone to banking activities. The Assessing Officer (AO) disallowed the payments, noting that the purchases were made in cash and not through account payee cheques, thereby violating section 40A(3). The CIT(A) upheld the disallowance, stating that the payments did not fall under the exceptions specified in Rule 6DD of the Income Tax Rules. However, the Tribunal noted that the payments were made in earlier years and not during the accounting period under consideration. Additionally, since the payments were made before the Sub-Registrar and were genuine, the Tribunal concluded that there was no merit in the disallowance under section 40A(3). The Tribunal reversed the CIT(A)'s order and deleted the addition of ?26,46,185/-.

2. Assessability of quantum of business income in respect of the sale of agricultural land:
The second issue pertained to the assessability of business income from the sale of agricultural land, which the assessee had converted into stock-in-trade. The assessee contended that the agricultural lands were held as investments and converted into stock-in-trade on 01.04.2012. The assessee argued that the business income should be computed by considering the fair market value as on 01.04.2012. The AO did not accept this contention due to the absence of entries in the books of account reflecting the conversion. The Tribunal noted that the assessee had provided detailed information regarding the land transactions, including the fair market value as on 01.04.2012. The Tribunal remitted the issue back to the AO for verification and computation of the correct income, directing the AO to determine the fair market value as on 01.04.2012 and assess the capital gains and business income accordingly.

3. Determination of income from long-term capital gains:
The third issue was linked to the second issue and involved the determination of income from long-term capital gains arising from the conversion of agricultural land into stock-in-trade. The assessee claimed that the conversion should be assessed under section 45(2) of the Act. The Tribunal directed the AO to verify this aspect and compute the capital gains based on the fair market value as on 01.04.2012. The AO was instructed to complete the enquiry and compute the income accordingly, providing the assessee with a reasonable opportunity of hearing.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleted the disallowance under section 40A(3), and remitted the issues related to the assessability of business income and determination of long-term capital gains back to the AO for verification and proper computation. The AO was directed to consider the fair market value as on 01.04.2012 and assess the income accordingly.