2022 (12) TMI 1126 - AT - Income Tax

Addition under the head income from capital gains - business of real estate development had converted her land into stock-in-trade in terms of provisions of Sec.45(2) - assessee has formed a layout as per approved plan from the local municipal authorities - AO has computed long term capital gains in terms of Sec.47(iii) of the Act, on land earmarked for road, on the ground that when the assessee has converted her own land into public roads, there is an extinguishment of right in the land which amounts to transfer within the meaning of Sec.47(iii) - HELD THAT - We ourselves do not subscribe to the reasons given by the AO for the simple reason that the land earmarked for public utility purpose in terms of municipal regulations while forming residential lay out, cannot be brought to tax either u/s.47(iii) of the Act or u/s.45(2) of the Act, because, relinquishment of right in land earmarked for common utility purpose, cannot be considered as extinguishment of any right in property which can be considered as transfer within the definition of Sec.47(iii) - the provisions of Sec.45(2) of the Act, also cannot be invoked to compute business profits when the land has been converted into stock-in-trade, because, the assessee has not transferred the land for a consideration. We are of the considered view that when the assessee has relinquished her right in the land earmarked for common utility purpose in terms of regulatory requirements and also executed Gift Deed in favour of the Commissioner, Virudhachalam, without any consideration, then, the question of computing long term capital gains on such land and also business profit in terms of Sec.45(2) of the Act, does not arise. In this case, the assessee has executed a Gift Deed dated 22.03.2019 and handed over the land in favour of the Commissioner, Virudhachalam Municipality. In our considered view, said transaction neither attracts capital gains as per Sec.47(iii) of the Act, nor business profit as per Sec.45(2) - We are of the considered view that the AO is completely erred in taxing deemed long term capital gains and deemed book profit in respect of 40,386.81 sq.ft. land earmarked for public utility purpose and handed over to local municipal authorities. CIT(A) after considering relevant facts has rightly deleted the additions made by the AO and thus, we are inclined to uphold the order of the Ld.CIT(A) and dismiss the appeal filed by the Revenue.

Summary

Issues Involved:
1. Deletion of addition towards capital gains based on CBDT Circular No.791.
2. Applicability of section 47(iii) to stock-in-trade.
3. Extinguishment of rights over land earmarked for public utility and its tax implications.
4. Applicability of section 43CA in the context of transfer under an irrevocable trust.
5. Exclusion of road component from stock-in-trade for tax purposes.

Detailed Analysis:

1. Deletion of Addition Towards Capital Gains Based on CBDT Circular No.791:
The Revenue argued that the CIT(A) erred in deleting the addition towards capital gains based on CBDT Circular No.791. The CIT(A) held that as per the circular, the date of sale or transfer of stock (converted from capital asset) is to be considered for tax purposes, not the date of conversion. The circular clarified that exemptions under sections 54EA, 54EB, and 54EC apply even after conversion of capital assets into stock-in-trade, which supports the CIT(A)'s decision to delete the addition.

2. Applicability of Section 47(iii) to Stock-in-Trade:
The Revenue contended that section 47(iii) applies only to capital assets, not to stock-in-trade, as the assessee had converted the capital asset into stock-in-trade. The CIT(A) disagreed, stating that section 47(iii) prevails over section 45 since it explicitly mentions that "nothing contained in section 45 shall apply." Thus, the transfer of land earmarked for public utility purposes under an irrevocable trust does not attract capital gains tax.

3. Extinguishment of Rights Over Land Earmarked for Public Utility and Its Tax Implications:
The AO argued that converting land into public roads extinguished the assessee's rights, thereby constituting a transfer under section 2(47) and attracting capital gains. The CIT(A) and the Tribunal found that land earmarked for public utility purposes, as per municipal regulations, does not constitute a transfer. The Tribunal emphasized that the land was held in trust for the public, and the formal registration of the road portion only formalizes this position. Thus, no capital gains tax is applicable.

4. Applicability of Section 43CA in the Context of Transfer Under an Irrevocable Trust:
The AO applied section 43CA to compute business profits, arguing that the fair market value should replace actual consideration. The CIT(A) noted that as per G.O.Ms.No.117, such transfers are chargeable to a nominal stamp duty of Rs.100/-. The Tribunal upheld this view, stating that the assessable value for stamp duty purposes would only be Rs.100/-, and thus, section 43CA does not apply to the transfer of land earmarked for public utility purposes.

5. Exclusion of Road Component from Stock-in-Trade for Tax Purposes:
The Revenue argued that the CIT(A) should have excluded the road component from stock-in-trade as it was intended for gifting, not sale. The CIT(A) and the Tribunal found that the land earmarked for public utilities was not transferred to individual buyers, and thus, section 43CA could not be applied. The Tribunal concluded that the AO erred in including the road portion in the business income and upheld the CIT(A)'s decision to delete the addition.

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. The Tribunal concluded that the land earmarked for public utility purposes does not attract capital gains or business profits under sections 47(iii) and 45(2) respectively, and section 43CA does not apply to such transfers. The appeal filed by the Revenue was dismissed, and the CIT(A)'s order was upheld.