2022 (6) TMI 70 - AT - Income Tax

Short Term Capital Gain - assessee had introduced the agricultural land in question as stock-in-trade in the books of the partnership firm as per the partnership deed - HELD THAT - It is pertinent to note that the land in question remained to be an agricultural land till 11.01.2011 when it was converted into non-agricultural land and the same was transferred by the assessee in his individual capacity to M/s Bhogilal Odhavji Industrial Enterprises Pvt. Ltd. by a registered conveyance deed on 12.05.2011. The land in question thus was never transferred by the assessee validly to the partnership firm of M/s. Vallabh Developers much less in the year under consideration when it remained an agricultural land since valid transfer of the same to the firm of M/s. Vallabh Developers was not permissible in the eye of law as the said firm was not agriculturist. The valid transfer of the said land thus was taken place after its conversion into non-agricultural land by a registered conveyance deed dated 12.05.2011 by the assessee in his individual capacity to M/s Bhogilal Odhavji Industrial Enterprises Pvt. Ltd. giving rise to the long term capital gain which was taxable in the hands of the assessee in AY 2012-13. The assessee duly declared such capital gain in his return of income filed for AY 2012-13 and although the learned DR has raised certain questions relating to the computation of such capital gain as well as the admissibility of deduction claimed under Section 54B of the Act at the time of hearing before us, it is observed that the learned CIT(A) in his impugned order has given direction to the Assessing Officer to examine the computation of income from capital gains offered on the sale of land by the assessee for its correctness or otherwise in AY 2012-13 in the light of observations made by him in his impugned order. As such, keeping in view all the facts of the case and having regard to the contentions raised by the learned representatives of both the sides as discussed above, we are of the view that there was no valid transfer of land in question by the assessee to the partnership firm of M/s. Vallabh Dvelopers in the year under consideration giving rise to any capital gain and the transfer of the said land having validly taken place only in the previous year relevant to AY 2012-13 by the assessee to M/s. Vallabh Developers, the capital gain arising from the said transfer was chargeable to tax in the hands of the assessee for AY 2012-13 as duly declared by the assessee in his return of income for AY 2012-13. In that view of the matter, we uphold the impugned order of the learned CIT(A) deleting the addition made by the Assessing Officer on account of short term capital gain and dismiss this appeal of the Revenue.

Issues Involved:
1. Deletion of addition on account of Short Term Capital Gain by CIT(A).
2. Validity of the transfer of agricultural land to a partnership firm.
3. Applicability of Section 2(47) and Section 45(3) of the Income-tax Act, 1961.
4. Legal status of the partnership firm and its ability to own agricultural land.
5. Timing and computation of capital gains tax liability.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Short Term Capital Gain by CIT(A):
The Revenue's appeal challenges the deletion of Rs. 3,60,15,240/- made by the CIT(A) on account of short term capital gain. The CIT(A) concluded that the transaction of transferring agricultural land to the partnership firm was void, and thus, no capital gain arose in the year under consideration.

2. Validity of the Transfer of Agricultural Land to a Partnership Firm:
The Assessing Officer (AO) held that the land was transferred by the assessee to the partnership firm as stock-in-trade, which constituted a transfer under Section 2(47) r.w.s. 45(3) of the Act, thus attracting capital gains tax. However, the CIT(A) and Tribunal found that the partnership firm could not legally own agricultural land as it was not an agriculturist, making the transfer null and void ab initio. The Gujarat Tenancy and Agricultural Lands Act, 1948, prohibits the sale of agricultural land to non-agriculturists without the Collector's permission, which was not obtained.

3. Applicability of Section 2(47) and Section 45(3) of the Income-tax Act, 1961:
The AO argued that the conversion of the land into stock-in-trade and its introduction into the partnership firm constituted a transfer under Section 2(47) and Section 45(3). The CIT(A) disagreed, stating that since the transfer was legally void, no capital gain could arise. The Tribunal upheld this view, citing that the transfer was invalid under the Gujarat Tenancy and Agricultural Lands Act, 1948, and thus, no capital gain could be charged for the year in question.

4. Legal Status of the Partnership Firm and Its Ability to Own Agricultural Land:
The CIT(A) noted that the partnership firm did not carry out any activities and was dissolved shortly after its formation. The firm could not legally acquire agricultural land as not all partners were agriculturists. The Tribunal confirmed that the firm was a private limited company, which cannot be an agriculturist, rendering the transfer void.

5. Timing and Computation of Capital Gains Tax Liability:
The CIT(A) and Tribunal both concluded that the land was not validly transferred to the partnership firm in the year under consideration. The land was converted into non-agricultural land on 11.01.2011 and sold on 12.05.2011. The capital gain from this sale was declared by the assessee in AY 2012-13, and any issues regarding the computation of this gain should be examined for that assessment year.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 3,60,15,240/- on account of short term capital gain, concluding that there was no valid transfer of the land to the partnership firm in the year under consideration. The capital gain arising from the eventual sale of the land in AY 2012-13 was duly declared by the assessee, and the AO was directed to examine the correctness of this declaration in the relevant assessment year. The appeal by the Revenue was dismissed.

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