2021 (7) TMI 20 - AT - Income Tax

Long term capital gain arising from transaction of sale of rights as per Joint Development Agreement (JDA) - claim of cost of acquisition - Adoption of indexation cost of acquisition - HELD THAT - Computation of gain arising from Joint Development Agreement is to be made after taking into account cost of land transferred to the builder under the agreement whereon the building is constructed. To put it simply in the present case the assessee has received consideration of 33 crores by assigning rights over 5 acres land in favour of the builder M/s. SAS Infoetech P. Ltd. and as such we find no justification in the action of the assessing officer in disallowing the claim of cost of acquisition. In any case merely because the land is continued to be reflected in the Balance Sheet of the assessee would not have any adverse implication on the computation of long term capital gain as the accounting treatment in the books of account cannot override the determination of real income under the provisions of Income Tax Act 1961. In view of the above we find no merit in the ground raised in the revenue s appeal and same is dismissed. A plain reading of section 45(2) makes it amply clear that it is the prerogative of the assessee to covert the capital asset to stock. Further the term Business carried on by him necessarily means that the capital asset so converted must form part of stockin- trade of the business carried on by the assessee. Assessee company is in the healthcare business and not in business related to real estate and as such it cannot be said that assessee by entering into the Joint Development Agreement has converted the land into its stock-in-trade. Therefore we have no hesitation in holding that there is no scope of applicability of section 45(2) of the Act to the facts of the present case. Therefore we are unable to find any justification in the action of the Ld. CIT (A) in invoking provisions of section 45(2). Once we have denounced the application of Section 45(2) there remains no basis for restricting the indexation to AY 2008-09 particularly when the taxable event arose in AY 2011-12 when the construction got complete and the assessee opted to part with 5 acres of land for a consideration of 33 crores. Accordingly in view of our reaching this considered opinion the assessing officer is directed to allow the benefit of indexation of cost of acquisition till AY 2011-12 i.e. the year of assessment of capital gain. - Decided in favour of assessee.

Summary

Issues Involved:
Computation of long term capital gain arising from the transaction of sale of rights as per Joint Development Agreement for Assessment Year 2011-12.

Analysis:

Issue 1: Cost of Acquisition
The assessee claimed the cost of acquisition while computing long term capital gain arising from a Joint Development Agreement. The Assessing Officer disallowed the claim, stating that since the land was still in the balance sheet, the benefit of cost could not be given. However, the CIT (A) allowed the benefit of cost of acquisition but restricted indexation till AY 2008-09. The Tribunal noted that the Joint Development Agreement involved transferring rights over 5 acres of land for a consideration of ?33 crores. The Tribunal held that the assessing officer's disallowance was unjustified as the land transfer for consideration was evident, regardless of its appearance in the balance sheet. The accounting treatment in books cannot override income determination under the Income Tax Act.

Issue 2: Indexation of Cost
The CIT (A) restricted indexation till AY 2008-09, citing conversion of the capital asset into stock-in-trade under section 45(2) of the Act. The Tribunal disagreed, noting that the Joint Development Agreement did not indicate commercial exploitation of land. The Tribunal interpreted section 45(2) to require the converted asset to be part of the business's stock-in-trade, which was not the case here. Therefore, the Tribunal directed the assessing officer to allow indexation of cost till AY 2011-12, the year of assessment of capital gain.

In conclusion, the Tribunal dismissed the department's appeal and allowed the assessee's appeal, emphasizing the rightful allowance of cost of acquisition and indexation till AY 2011-12.